Pondering taxes in Massachusetts today. Three things led me to my ponderings:
1. The fact that many people blame the Mass. legislature for not lowering the Massachusetts income tax from 5.3% to 5% a few years ago.
2. The idea of a gas tax to reduce consumption
3. A recent article noting that T ridership was at an all time high last year thanks, in part, to rising gas prices
These things caused me to ask:
How much would you have to raise the gas tax in Massachusetts to make up for the revenue lost by a reduction of the income tax?
Might such a tax increase have a hidden (or maybe not so hidden) additional revenue boost for the state in terms of increased use of public transportation?
Before I go on with how I figured this, some problems that I should address:
1. Dated/sketchy numbers. As you’ll see below I don’t have the most recent/best numbers for my data.
2. (This is the big one) Higher gas prices would lead less people to drive. Less people driving would result in less consumption of gas meaning that a higher tax would be needed to get to the same revenue point. I can’t think of a good way to account for this in my calculations.
How I figured this out:
According to the Massachusetts Budget and Policy Center, Massachusetts raised $10.5B in personal income taxes in for FY06 from the 5.3% rate. Therefore, assuming a proportional reduction, an income tax decrease to 5% would mean:
$10.5B – [($10.5B/5.3) x 5] = $593.5M less in tax revenues
So we would need a gas tax to make up about $600M in revenues. The Energy Information Administration says that in 2005, Massachusetts consumed 68,048,000 barrels of oil for motor vehicles. According to multiple sources, there are 19.5 gallons of gasoline per 42 gallon barrel. This means that Massachusetts’ gasoline consumption is:
68.048 x 19.5 = 1.33B gallons of gasoline.
To figure out how much we’d need to tax each gallon to make up our lost income tax revenue:
$593.5/1330gal = $0.447
So the way I’m figuring this out, each gallon would need a 45 cent/gallon tax to make up for reducing the income tax by 0.3 percentage points.
Currently, Massachusetts has a 41.9 cent per gallon gas tax. Therefore, I would be proposing a 107% increase in the gas tax to support a 5.6% reduction in the income tax. Not sure that’s going to work politically.
Again, this ignores the fact that such an increase would likely result in reduced consumption AND the fact that such a tax would almost undoubtedly have to be accompanied by some kind of credit/rebate for low income drivers (especially in rural areas).
Earlier this morning I thought I had hit upon a great way for Massachusetts to cut taxes and save the environment. I fear I may have more work to do on that front.
6 comments:
I think you rightly hypothesized that an increase in gas taxes will lead to less consumption. You would need to know the elasticity of demand in order to figure out if the decrease in demand is significant enough to cause a decrease in revenues. It is possible that demand will not decrease enough to cause a decrease in revenue.
However, I think you overlooked something. In my opinion, you must apply the same principle (change in tax leads to change in consumption/production) to changing the income tax rate. If you lower the income tax rate, will the revenues from taxes decrease or increase? See the WSJ article in KLR's Punish the Poor to Punish the Rich. You said that revenues would decrease. It is very possible that revenues could increase from a lower increase tax. An increase in revenues is almost certain when capital gains taxes are lowered. I don't know when it comes to income taxes, but I would guess the same results. Again, you'd have to know the elasticity of demand, for starters.
So, if raising the gas tax would decrease revenue, isn't it likely that lowering the income tax would actually increase revenues?
(To piggy-back on the above-- there are both income and substitution effects to be concerned about in changing the tax structure)
Demand for gasoline is pretty inelastic and the Laffer curve is sure to be upward sloping and relatively flat at a 5% income tax rate. Plus the income effect for gas would offset the price respose. So, gasoline consumption and supply-side growth are not likely to change these rough calculations *much* (maybe they will, who knows?). I think your calculations are probably pretty good. What makes you think it's such a political non-starter? Of all states, I would thing Mass would be happy to pay 50 cents more for gasoline for even marginal income tax relief. I would.
My one skepticism is that legislators would end up making the income tax more progressive to compensate for the regressiveness of the gas tax and there would not actually be any reduction in income tax revenue.
Also, is public transportation a revenue generator? My instinct is no.
Even if public transportation is not a revenue generator, it seems that an increase in the number of riders would not add much cost to the system. The need for public subsidization would, therefore, decrease.
That was kind of my take too. No, public transportation, if anything, is a bit of a money pit (1 cent of MA's sales tax is devoted to the MBTA and it's still had to more than double fares since I graduated from college). My thought was it would hopefully just decrease the need for further subsidization.
The reason why it's a political nonstarter (I think) is because there's a lot of pressure to reduce the state's income tax, even without a compensating revenue source. So I think this move would be heavily criticized for exacting a steep payment (the gas tax) for something that should be done anyways.
As someone who doesn't own a car, I'm definitely for it.
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