Economic Illiteracy at Work

There are many reasons to be appalled at the latest crop of proposals to raise taxes for transportation improvements, but the one that is making me irritable at the moment is the total absence of economic thinking. Both Gov. Timothy M. Kaine and Senate Finance Chair John Chichester have submitted proposals that would raise roughly $1 billion a year — but neither one wants to do it by increasing the gasoline tax. House Republicans don’t want to raise your taxes, just divert General Fund money to transportation spending, but their thinking displays an equal deficit in economic understanding.

The strategy consists of the following: raise revenue from other sources, the more hidden to the taxpayer the better. The idea is to fleece the taxpayer while causing as little squawking as possible.

This is bad policy. If you must raise taxes, then put the burden squarely on the gas tax where it belongs. Make the tax as close to a user fee as you possibly can. At least with a gas tax there is a direct correlation — not a perfect one, but a strong one — between the amount of wear and tear a motorist causes on the transportation system, how much he drives, how many gallons of gasoline he consumes, and how much he pays in taxes. At least raising the gasoline tax encourages people to try to find ways to drive less, thus reducing the stress, at least marginally, on the transportation system.

But apparently this elementary economic concept is alien to our lawmakers. Kaine and Chichester would prefer to raise the sales tax on automobiles. Presumably that would be less objectionable to voters because they could finance their tax payment, along with their car payment, over four or five years! Unfortunately, the same tax rate would apply whether the buyer is a 70-year-old granny who drives 6,000 miles a year or a road warrior who drives 30,000.

That kind of thinking will only keep Virginia on a treadmill: Build more roads to relieve congestion, but do nothing to discourage the relentless increase in Vehicle Miles Driven that causes the congestion in the first place.

(Note: I have revised this post to eliminate ad hominem attacks that I made in a fit of severe grumpiness.)


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17 responses to “Economic Illiteracy at Work”

  1. Anonymous Avatar

    “We simply urge contributors and commenters to maintain a collegial atmosphere. Direct all the fire and fury you want at another person’s argument, but do not engage in ad hominem attacks.”

    “cowardly…pusillanimous…puke.”

    Hmmm. I hope your regurgitation doesn’t spill out into my keyboard. Have a nice weekend, Jim. I’ll check back on Monday.

  2. James Atticus Bowden Avatar
    James Atticus Bowden

    Jim, when they tried to get the voters to raise taxes themselves in 02 – they lost big. They have a formula now. Take the tax cuts where it won’t slap the voters in the face every day (and in the sales tax last year – make it smaller to bleed with a thousand cuts) and do a tag team attack.

    The Dems offer a huge tax raise. The RINOs offer a bigger tax raise. Compromise is the huge tax raise.

    In the absence of a conservative plan and in the absence of conservative leaders who put a face to the alternative and campaign for it – the Dems and RINOs win.

  3. Anonymous Avatar

    Mr. Bacon, I can’t disagree with you on this issue at all. Like you I think that fees or special taxes should reflect usage or benefit as near as possible.

    That is why I supported the much hated “car tax”. If a family can afford to own and drive 2 or 3 SUV’s for hundreds of miles a week, then they can pay the taxes on them. The little old lady who owns a 20 year old car and drives it 3 times a week (church, shopping, doctor) for maybe 15 miles total pays little.

    If you had a bit of money but still wanted low car taxes, don’t drive an expensive new car! It was totally in your control, not like the couple who bought a house in a working class neighborhood 35 years ago and now can’t afford the real estate tax on it because the neighborhood has gone upscale. I looked upon it as a vanity tax – drive the $30,000 vehicle, get the nods of approval and envy from your friends and neighbors, but PAY for it.

  4. Jim Bacon Avatar

    Anonymous 10:15, Your chastisement is justified. I should not have used the word “cowardly.” You are correct, it adds nothing to the power of my argument. If anything, it would only alienate those to whom the adjective was directed. Therefore, I retract the use of the word. Indeed, I will go back and re-write the post.

    Anonymous 10:26: I share your thoughts exactly regarding the car tax.

    Jim: I don’t know if you’ve described a conscious, deliberate strategy on the part of the tax raisers, but your note certainly describes the dynamics at work.

  5. Lucy Jones Avatar
    Lucy Jones

    What about the costs for businesses – those who have service vans/trucks on the road.

    You raise the gas tax and it’s going to get passed right along back to you. Your plumber, HVAC, power company, phone company, etc. will take a hit and they are not going to absorb the costs. Many companies are already adding fuel costs since the Katrina impact on fuel prices even though the prices have somewhat come back down.

    One of the best ways I can think of to reduce transportation issues in NoVa and other heavily populated areas – stop begging/paying companies to go to those areas (i.e. CGI-AMS)!

    I would personally like to see those very large companies impacted more than small businesses and general citizens. Something like, if you have a certain number of employees and are in a heavily poplulated/congested area, then you pay more to the transportation funds…

    Just my little opinion….

  6. James Atticus Bowden Avatar
    James Atticus Bowden

    I read an article (senior moment forgetfulness on source) comparing economic growth in Ohio and The Commonwealth over the past 15 years. The Ohio Republicans (for the most part) joined the Dems in raising taxes for vital services blah blah – and the difference in the economic health – jobs, personal income etc – was stark. Now, Virginia with the help of its elected RINOs is going the same way.

    Let’s go back to Ec 10 (or Econ 201) depending on where you learn it.

    1. Do tax cuts create more wealth, jobs and revenue for the government over time?

    2. Or said conversely, do tax increases reduce wealth, kill jobs and flatten, then lower, government revenue over time?

    Which is it?

    Federal spending and Federal tax cuts are saving Virginia’s butt. But, not all of the Commonwealth.

  7. Anonymous Avatar

    Lucy,

    You make the point. By raising the gas tax, it directly affects those who use it. Infastructure has been subsidized for a too long by other taxes. Its time to make those costs felt. Big companies pass along thier costs to the consumer just as quickly as small business does….

  8. Ray Hyde Avatar

    I think the gas tax is a reasonably good proxy for weight and use: I don’t have a problem with it.

    The car tax was grossly unfair: the assessments had nothing to do with reality. Frequently I had vehicles that I would have gladly sold to the county for the assessed value. If you had that nice new vehicle, it was OK, but for those of us who drive a vehicle until the wheels come off, it was a screw job.

    Then there are people like myself that have several farm trucks and trailers that are seldom used. I often felt like I was being taxed just for keeping them out of the dump.

    Lucy is making a point I have frequently made: sometimes the effort to charge those who use a service or create its need is a joke. The costs get passed around and we all pay anyway, plus the interest, handling fees, and sometimes profit. In particular I think we are kidding ourselves if we think developers are going to pay for our infrastructure.

    JAB is right, the economy is so complex that we don’t know for sure what the impact of any particular policy will be. If we are going to make policy to produce some desired social result, we should be sure of what the costs are.

    I didn’t catch the result though, what was the effect in Ohio? Ohio has a whole different rust belt problem than Virginia, but surely we can learn something.

  9. The Richmond Democrat Avatar
    The Richmond Democrat

    I think the car/vehicle tax should be based on weight, not value.

    I drive a 2,400 lb BMW Z-3: I doubt I’m doing much damage to the roads, but I have to pay as much in tax as, say, a 20,000 lb dump truck.

    As for all the crocodile tears you are shedding over taxes: if people want transportation solutions they have to be paid for. Mostly I think this is just an attempt by the anti-taxers to psych themselves up and try to be relevant again. Since 2004, no one’s paid much attention to the anti-taxers.

  10. Uncle Lester Avatar
    Uncle Lester

    Questions for the day:
    1. Why is the word “crisis” used when politicians want to raise your taxes? Budget crisis, transportation crisis, education crisis. Maybe Kaine along with Chichester and others should form a new party. Call it the “Chicken Little Party”
    2. If transportation is so bad, it didn’t happen overnight. Did the Warner Administration hold back transportation funds or work for the last 4 years?
    3. Where are the Reagan Republicans in the General Assembly?

  11. Lucy Jones Avatar
    Lucy Jones

    My comment wasn’t necessarily about the gas tax for those large companies. Maybe just stop giving the companies all the tax relief that they are getting in those areas. I don’t know about all the issues with the Northrop Grumman deal but at least the state inserted into the deal that they would go to a less populated area. My suggestion is to do this more often in the big picture and stop bringing more and more congestion to the overpopulated areas.

    I may get another econ lesson but isn’t the job and industry market that is pushing the transportation problems? Why are we paying companies to come to these already problem areas? Why not try to woo some of the large companies out to other areas and take their traffic with them?

  12. spankthatdonkey Avatar
    spankthatdonkey

    ” If transportation is so bad, it didn’t happen overnight. Did the Warner Administration hold back transportation funds or work for the last 4 years?”

    Outstanding post/comment !!! How services are delivered from the State Govt. to the people needs to be “reformed”. State spending is increasing much faster than inflation… but yet few want to discuss this??? The argument is being framed “how big of an increase is necessary” that is all you hear…

  13. Ray Hyde Avatar

    “….stop bringing more and more congestion to the overpopulated areas.”

    Oh, Lucy. such heresy!

    Don’t you know that the answer to dysfunctional settlement and congestion is to put all development in the overpopulated areas and have them use shared vehicles?

    You suggestion suggests we might have to use some of the 97% of space that we are currently saving for some time when we need it.

  14. Ray Hyde Avatar

    Vehicle Miles Driven does not cause congestion. Trying to drive them all in the same place at the same time causes congestion.

    We don’t have a congestion problem, we have a peak load/location problem. If you divide the peak load by more locations, you have a smaller problem.

    VMT doesn’t mean squat. You have to consider the quality and value delivered for the price. Which is worse 100 VMT in a two seater honda hybrid, or in a half empty bus?

    Which is worse, 10 VMT that takes an hour, or 20 VMT that takes 20 minutes?

    The idea that we can reduce VMT and therefore congestion by putting more people in one place is proven to be wrong. Even Metro has the same problem, that is why they charge more during rush hour. Get over it.

    Can we make the VMT we use more productive and less damaging? Yes. How do you do that? Raise the price, but not too much. Call it a tax increase if you want, but you can’t have it both ways. If transportation is too cheap people will use it too much.

    Take the money and use it for Metro if you want, make Metro free if you want. But you can’t have it both ways and expect people to pay for what they get. The only way that happens is if they also pay for what they want.

  15. Ben Kyber Avatar

    Jim,

    I have to say, I really do agree with you that a usage tax would be much prefered to a blanket increase.

    But I don’t know about raising the gas tax. People are so used to fluctuating gas prices as it is that I don’t think it would really make a huge difference. Its a little theory of mine that the more gas prices rise and fall, the more comfortable people get paying higher prices. Fluctuating gas prices = increased inelasticity. People are so fed up that they just don’t pay as much attention.

    I think it might be worth exploring tax credits for using public transit. If buying your metro card was tax deductable, think how many more people would use the metro.

  16. Ben Kyber Avatar

    Why do the number of comments on this post keep going down?

  17. criticallythinking Avatar
    criticallythinking

    It hardly changes the big picture, but one of the proposed tax changes (removing the sales tax exemption on gasoline) is equivalent to raising the gas tax without literally raising the gas tax. It will have the same effect.

    Except that, being a sales tax, we aren’t certain it will go to transportation, like the gas tax itself. I’m sure it will go there for now, but in a couple of years the special interests will drag that money off for more useless spending like another big increase for education or something.

    Imagine how different our lives would be today if half the lottery went to transportation, and education was left begging for more money in dedicated tax funding?

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