Can We Raise Gas Taxes to Build More Roads and Make Driving Easier, and at the Same Time Save the Environment?

August 17, 2007

Senator Max Baucus, chairman of the poweful Senate Finance Committee, came out Thursday opposing a proposal put forth by Rep. Jim Oberstar (D-MN) that would raise the federal excise tax on gasoline by 5 cents. From the Associated Press:

There’s no need to raise the federal gasoline tax, the Democratic chairman of the Senate Finance Committee says, dimming the hopes of some in his party who want the increase to help pay for nationwide bridge repair.

Montana Sen. Max Baucus, a longtime foe of such increases, said in an interview that continuing to rely on gas tax revenue is not feasible, since more people are using hybrid cars and the cost of highway construction materials is going up. There are better alternatives, he said, but he would not provide details.

“I don’t think an increase in the gasoline tax is needed,” Baucus said. “I don’t favor it.”

After the deadly bridge collapse in Minnesota earlier this month, Rep. Jim Oberstar, D-Minn., proposed a 5-cent increase in the 18.3 cents-a-gallon federal gasoline tax to establish a trust fund for repairing or replacing structurally deficient highway bridges. Oberstar is the Democratic chairman of the House Transportation Committee.

Oberstar said the trust fund would be modeled on the federal Highway Trust Fund, which pays for building and repairing roads and bridges through the gas tax.

If Congress wants to enact a “green tax,” the gas tax is a poor choice, a mediocre proxy for carbon emissions. But in trying to target carbon more generally, the hardest part is determining the level of harm and thereby the optimal tax rate.

With regard to the benefit principle of paying for transportation, Congress would ideally base the amount of the tax on the amount of road usage (weight of the vehicle plus miles traveled). Unfortunately, transaction costs and privacy concerns prevent us from doing such road-usage monitoring, although the technology is pushing us in that direction.

One other caveat: If we raise gas taxes substantially, most people will expect the nation to drive fewer miles. But if we actually do spend the extra money on roads, then those better roads will encourage driving, partially offsetting the immediate effect of the higher gas tax rate. This leads the most cynical environmentalists to favor spending the Highway Fund on museums and other boondoggles so that deteriorating bridges and roads will eventually deter drivers and their pollution. This is the “depress the economy” approach to saving the environment.

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