Can a tax do two jobs at once?

I’m in no position to hold my own in an economic discussion with Robert J. Samuelson, The Newsweek and Washington Post columnist was one of Kerri Miller’s guests in the first hour of Midmorning on Minnesota Public Radio today. But something he said about taxes this morning didn’t make sense to me.

Kerri prodded Samuelson for an answer about an obvious shortfall in Social Security benefits for now-retiring baby boomers. “The tax increase that is required will have to be massive,” he said. He might’ve also used the word “inevitable.” He said the retirement age would have to be raised and benefits cut for wealthy retirees. Nothing much you haven’t heard before.

“But Barack Obama wants to provide a middle class tax cut,” Kerri pointed out. Samuelson responded that an incoming president ought to be able to enact the main part of his platform but opined that what he would do is raise the gas tax a penny a gallon each month for the next three years to help raise necessary funds.

OK so far, if that’s what he wants to do. But then he added this:

“Plus, it would send a message to automakers to start making, and consumers to start buying more fuel-efficient vehicles.”

Can a tax — any tax — be both a way to raise revenue and an incentive to change behavior? How?

cigarette_lighting.jpgGov. Pawlenty proposed his cigarette tax (I refuse to call it a health impact fee) during the lean budget years of his first term. And he noted it would be an incentive for people to quit smoking. What would happen if half of the cigarette tax’s mission was fulfilled? It would be unable to fulfill the other half.

It’s not as though the state isn’t trying to squeeze as much as possible out of the sale of cigarettes. It quietly raised the sales tax on distributors by a penny in August.

Cigarette taxes are now “a lousy way to fund your government,” David Brunori, said last year in an Associated Press story predicting a drop in revenue in Minnesota and other states. He teaches tax policy at George Washington University.

True, it’s a small slice of the overall budget pie here. But the 2007 projected $449 million cigarette taxes raised in Minnesota isn’t much to sneeze at. And according to the February budget forecast, tax revenues from tobacco products, which pulled in $407 million in fiscal year 2006, are projected to raise $36 million less this year, with another $8 million drop next year. A statewide smoking ban also is a factor, of course. This week’s forecast, from all accounts, may make those numbers look robust. The cigarette taxes are doing one job so well, it can’t do the job for which it was originally intended.

Why wouldn’t the same thing happen with an increase in the gasoline tax? Samuelson’s plan — I figure — would cost each driver about $120 a year. Getting 5 miles-per-gallon more would neutralize the tax. Sure, it’d be a great way to push more fuel-efficient vehicles, but can it do that (which obviously leads to lower consumption of gasoline) and still be a solution to the revenue ills of the U.S. government?

I’ll hang up and listen.

(Photo by Getty Images)

  • bigalmn

    It would be interesting to understand if the tax on cigarettes or tobacco pays for the extra health costs we pay because there are smokers in every group.

    The same with the gas tax. Smaller lighter cars would put less wear on the road so we may have to spend less if a lot of people drive lighter cars.

    You can tell which roads get a lot of trucks – the right lane is like driving on a washboard. The railroads are underwriting on public radio that they can move a ton of freight 320 some miles on a gallon of gas.

    If we had a higher gas tax you would probably see a lot more freight on the rails instead of long haul truckers – again less wear and tear on the roads.

    In other words a tax that pays you back.

  • bsimon

    I think its a timing thing. An increased gas tax will eventually incent drivers to buy more efficient vehicles and/or drive less. But that effect is unlikely to be significant for a number of years. Presto! Short-term budget fix, with long-term incentive to lower consumption. The reality is that a penny-per-gallon change in gas prices has effectively zero effect on consumers’ behavior. Even the full 12 cent increase (for one year’s worth of the Samuelson tax) is dwarfed by the price swings we’ve seen over the last year or two. Yet all those pennies would amount to a significant source of income for government – until the fleet is eventually converted to more efficient vehicles.

  • Bob Collins

    I’m not arguing the merits of either the gas tax or the cigarette tax, but the lack of definition about why a tax exists. If part of its intent over the long term has the net effect of reducing the revenue, is it logical that another part of its intent is to increase revenue?

  • david zuhn

    I think the tax can have its dual effects, if done right. However, we need to look at the timeframe of those effects. Take the case of the additional gas tax increases.

    The policy goals will be a long term achievement of the tax (if they work at all). No one can expect everyone to purchase a very fuel efficient vehicle next month, next yeas, or even in the next 5 years. I recall that there are well over 100 million cars on the road in the US. At 15 million new cars per year (2007) that’s quite some time to get a full fleet replacement. 2008 is on track for 11 million new cars.

    In the short term, which is really all that the legislative branch will consider for revenue projections, an increase in the gas tax does translate into an increase in revenues, and it opens up a window of time to start looking down the road and answer the question “So what happens when everyone is driving a 50mpg plug-in electric hybrid and gas sales plummet and thus gas tax revenues also plummet?”.

    That’s where the legislative model breaks down. A body of people up for election every 2 or 4 years is really bad at trying to come up with policy that will need to be applied in 10 years time. We’ve got think tanks all with their ideas, but trying to get a law passed that has little application today but a great future is nigh on impossible.

  • Douglas

    This is an interesting question. In the short term it can do both, which I personally think is wise. Friedman’s new book “Hot, Flat & Crowded,” cites these methods as lifestyle changing and beneficial in other parts of our world. The argument was convincing in the book (which I found to be very interesting and inspiring).

  • Alison

    Your point is a good one, Bob, but you fail to account for the key players in this: politicians. If you are a politician with a short time horizon you can pass the tax, make the extra money, and leave it to the next person to figure out how to really fund your project in the long term. Of course the next person can also use a new gimmick. It’s not stable, but if you look like a hero it really doesn’t matter.

  • JohnnyZoom

    Acch. Game theory makes me sleepy. But that is what this is.

    Saying the tax is meant to both change behavior and raise revenue is, strictly speaking, a misnomer, because of the zero-sum-like nature of the two.

    However, it is quite easy to see that such a tax makes it impossible that neither happens. I read the spirit of these things to be more along those lines. We know this tax will do something good, although we cannot say in advance which something that will be.

    And yes. it’s possible for it to accomplish both, albeit then the degree to which either benefit occurs becomes limited. And yes again, Friedman is always a good read.

  • bsimon

    “I’m not arguing the merits of either the gas tax or the cigarette tax, but the lack of definition about why a tax exists. If part of its intent over the long term has the net effect of reducing the revenue, is it logical that another part of its intent is to increase revenue?”

    A tax may exist for more than one reason. Depending on whom one is trying to convince of the merits of a tax (or anything else), the arguments may change. The new constitutionally mandated sales tax for the environment and the arts is an example.