A Gas Tax With Refunds

February 17, 2006

The State of Virginia is considering a measure that would raise the state’s gas tax, but would also allow individuals to be refunded at the end of the year if they properly maintain proof of purchase. From today’s Washington Post:

State senators in Virginia have come up with an unusual new tax increase. People who don’t like it don’t have to pay it.

But here’s the catch: They must be especially well organized.

The Senate, which hopes to raise about a billion dollars a year to spend on transportation, is seeking a 5 percent increase in the wholesale gas tax to help raise the revenue.

Even though the tax is on wholesalers, it could well be passed along to motorists as they pump their gas.

So under a bill that the Senate Finance Committee passed this week, they could get some money back. That is, they could get it back if they saved all those flimsy little gas purchase receipts littering their car floors and spilling from their glove compartments and sent them in to the state Department of Motor Vehicles.

Twice a year, motorists could ship off a bundle of receipts and, weeks later, receive a check in the mail representing a rebate of the new gasoline tax. Based on today’s gas price, the refund would amount to about 8 cents a gallon. (Full Story)

This is a way to increase the gas tax in a way that targets two groups: the unorganized and higher-income drivers. It targets higher-income drivers more so because their opportunity cost of the time and effort spent maintaining receipts is greater than lower-income drivers. So in a roundabout way, this is a less-regressive gas tax than would be if the state passed a typical gas tax.

The tradeoff, however, is that this will be massively complex for taxpayers and administrators, and the compliance costs will be huge. Furthermore, the proposal is to have the Department of Motor Vehicles administer the refund program. (And you thought DMV was busy now.)

Finally, because receipts are most easily obtainable when paying by credit card, this may deter individuals from paying by cash, and thereby lead to higher credit cards bills and possibly enticing drivers into debt-financing of gas.

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