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A Gas Tax Idea Worth Talking About: Refundability

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Of late, innovative thinking on transportation finance on Capitol Hill has largely been limited to finding innovative new budgeting gimmicks to forestall the ultimate day of reckoning for the rapidly depleting Highway Trust Fund.

So, it is refreshing when an actual innovative (if imperfect) idea finds its way onto the table, which happened this week in the form of a proposal from Republican Rep. Tom Rice of South Carolina.

Rep. Rice’s idea is as follows: raise the federal gas tax by 10 cents per gallon, but give taxpayers a corresponding income tax break to make the tax increase revenue-neutral. The story in The Hill describing Rep. Rice’s proposal did not go into details – and the details matter a great deal – but the idea of hiking the gas tax and refunding some or all of the revenue to taxpayers is one that is at least worthy of discussion.

We mentioned the concept of refundable fees on driving briefly in our recent report Who Pays for Roads?, but the political and policy case is straightforward. Driving is significantly underpriced – that is, the money raised in revenue from the gas tax isn’t sufficient to pay for the upkeep of the transportation system, much less compensate society for the tremendous environmental, public health and crash costs imposed by auto use. Political support for raising the gas tax to the appropriate level, however, is minimal to non-existent, and difficult to muster in a nation where almost everyone has to drive all the time.

A refundable gas tax has the potential to address both of those problems. If refunds are provided on an equal per-capita basis, and if they are provided to all Americans, not just those who drive, the result could be a system that allows motorists to finally be charged something approaching the full cost of driving – a move that would discourage unnecessary driving, encourage less auto-dependent forms of development, and help level the playing field for competing modes of transportation.

Here’s why: a 10-cent gas tax increase is more costly to those who drive a lot – say, a 60 mile-per-day supercommuter – than those who drive a little or don’t drive at all.  If all Americans receive an equal refund of gas tax revenues, those who drive more than average will see a net increase in taxes, but those who drive less than average will receive a net tax cut.  The fact that roughly 50 percent of Americans would benefit financially from such a system has the potential to create a political constituency for higher gas taxes while potentially (see below) mitigating the regressive effects of a gas tax hike. And if the resulting changes in driving patterns serve to reduce congestion, perhaps even some drivers who pay more into the system would come to support it.

The other benefit of such a system is that it would reduce the unfairness currently embedded in federal tax policy, which provides lucrative tax breaks to automobile commuters, while providing minimal or no benefits to those using sustainable modes of transport.

That’s the theory, anyway. In practice, there are several important issues that make a refundable gas tax less of an automatic slam-dunk:

  • Paying for transportation: One downside of Rep. Rice’s solution to the transportation funding crisis is that it doesn’t necessarily create an additional dime of revenue for transportation. Rather, it continues the recent trend of directing funds from general taxes toward transportation. In the long run, that could be a good thing – as the Eno Center for Transportation noted earlier this year, most other industrialized countries pay for transportation out of general funds, and a shift toward more general funding could help drive reform of our transportation spending priorities, which are currently shaped by outdated assumptions about where transportation revenue comes from. Indeed, if the choice is between a system like this – which pairs general fund expenditures on transportation with a price signal to drivers – and one that simply diverts money that would otherwise go to the general fund (such as taxes on overseas corporate profits) to highways without a price signal - the former has a lot to recommend it.
  • Equity: A refundable gas tax system would seemingly be a no-brainer from the equity perspective: vehicle ownership and use increase (to a point) with income, so a refundable system would – in theory, at least – leave most low-income people better off. The devil, however, is in the details – if the refund is provided in the form of an income tax credit, those who do not itemize their taxes or file an income tax return (mostly low-income people) would not receive any benefit at all. Any refundable gas tax system would have to be carefully designed to ensure that low-income families have the opportunity to benefit and that the needs of specific constituencies who might be harmed by such a system (such as the rural poor) are addressed.
  • Funding sustainable solutions: A refundable gas tax has much in common with the fee-and-dividend model for pricing carbon dioxide emissions. British Columbia adopted a revenue-neutral carbon tax several years ago, a move that has seemingly been successful in reducing emissions while retaining political support. If one believes, however, that rebuilding our transportation system along sustainable lines will require substantial investment, a revenue-neutral fee on gasoline use would appear to an inferior solution to systems such California’s (PDF) use of carbon cap-and-trade revenues to fund high-speed rail, transit and other low-carbon transportation alternatives.

While Rep. Rice’s concept might ultimately not be worthy of support by transportation reformers, he is to be commended for bringing a provocative idea to the table. Only by looking beyond our current, shopworn system of funding transportation can America develop a system that can serve the nation in the 21st century. New ideas from across the political spectrum will be needed to get us there.