A tax is one of those things that should be simple, but isn’t. When economics and politics get together, the results are often shrouded in a deep fog.
Politicians, naturally enough, want the money, but they don’t want to be blamed for collecting it. Economists want … well, actually it’s never been clear what they want but whatever it is they certainly aren’t known for simplifying things. As a result, they end up acting as enablers for politicians — making discussions of taxes and their economic impact so complicated that our heads spin.
We have income taxes, for example, which we are all too familiar with but whose complexities no mortal being can fully comprehend. And there are various forms of asset taxes, the most common being those on real estate, cars and boats.
Besides those categories, taxes come in two basic types. The first is called an ad valorem tax, one which depends on the value of the transaction. Our state sales tax is an example of this kind of tax. The second is call a unit tax, where the tax is levied, for example, on a per-gallon basis as it is with federal and state taxes on gasoline or alcoholic beverages.
The big difference between the two types is that an ad valorem tax goes up with the value of the transaction; a unit tax does not. The tax on a bottle of whiskey, for example, is the same whether it is McSnooty’s Special Reserve or plain old rotgut.
It’s the same with gasoline. When gasoline prices increase, the federal and state tax revenue does not go up. In fact, it goes down. The demand for gasoline is not highly sensitive to price changes — it’s what economists call inelastic — but when prices increase enough to collide with individual and household budget constraints, consumers eventually respond by buying fewer gallons of gas.
When fewer gallons are sold, then, gasoline tax revenue goes down, even though consumers are spending a lot more on gasoline than they did a year ago. And when gasoline tax revenue goes down it creates a hole in the road maintenance and construction budget.
Per-unit taxes are usually easier to collect. Our state’s gasoline tax, for example, is collected at the distributor level, which is far more efficient than having each filling station calculate and collect the amount due.
And from an engineering standpoint the per-unit gasoline tax makes sense. Each gallon of gasoline used has a direct effect on the amount of wear and tear on our roads — and the amount of maintenance and repair needed. The price we paid for it has no direct relationship to anything other than our wallets.
A few economists have recommended getting rid of per-unit taxes and substituting a sales tax. That would eliminate the particular type of state roads budget crunch that we are experiencing now, but it is not without some economics baggage of its own.
First, sales taxes amplify the effect of price changes. If the price of gas goes up, a sales tax will make it go up even more.
Second, sales taxes are regressive in that they have a bigger impact on lower-income household budgets than on more prosperous households. In a time of dramatic price rises in gasoline, the net effect of a sales tax would be to enrich the state government at the expense of the people who can least afford it.
Six states currently collect all or some of their gasoline taxes on an ad valorem basis, but there isn’t one of them whose current financial situation should be a source of our envy. Sometimes you just have to get a sharp pencil and deal with stuff.
Part of the road maintenance shortfall is temporary — and due to what economists, and company finance officers, call a “leads and lags” problem. Today’s road maintenance needs are based on yesterday’s road usage, but paid for at today’s or tomorrow’s prices. Eventually, though, the ratio between gallons of gas consumed and roadway wear and tear will bring the budget back into balance. (The impact on that ratio when hybrid cars and plug-in vehicles are added to the traffic mix, though, is a story in its own right.)
The part of the road construction and repair budget problem that is not likely to go away soon is the increased costs due to rapidly rising materials prices — especially for asphalt, which is produced from crude oil.
The roadwork budget shortfall will undoubtedly affect the perspective of both the Legislature and the voters as they examine and decide on issues such as expanding bus routes and schedules. Meanwhile, is there some way to grow ethanol-corn in those potholes?
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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