Background Paper No. 33
Executive SummaryConvoys of protesting truckers, fast-rising gasoline prices, and the presidential contest have focused attention on a type of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. that taxpayers are rarely aware of: excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es. A new study from the Tax Foundation explains the history of one such tax: the inland waterway fuel tax. According to Tax Foundation Background Paper No. 33, titled “The Unintended Consequences of the Inland Waterways Excise Tax,” the inland waterways tax is economically and environmentally destructive.
Much less visible than income or sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es, excises are taxes that federal and state governments put on specific products. Some of these products are things we buy every day without knowing that a tax is part of the price, and some are things only businesses use, but of course, even though businesses pay the tax, they pass the extra cost on to individual taxpayers.
The new study’s author is John Dunham, an economist with Philip Morris Management Corp. He first explains what the inland waterways system is: 25,000 miles of lakes, rivers, and canals as well as the infrastructure needed for ships to traverse them, reaching from the ocean into 35 states, to points as far inland as Oklahoma.
He then explains the history of the tax and its problems. In 1978, Congress passed a tax of 4 cents per gallon on fuel used on the waterway. The rate has risen steadily to 24.4 cents per gallon. In FY 1997, the tax generated $108 million which the federal government earmarked toward the Inland Waterways Trust Fund.
According to Dunham, the imposition of the inland waterways tax either reduces interstate trade and commerce or moves that trade to trucks and railroads. Dunham defends the waterway in this comparison, quoting the assertion by the Army Corps of Engineers that barges are safer and more energy-efficient than rail or trucks, creating less air pollution per ton mile carried and reducing highway accidents and hazardous cargo spills.
Dunham quantifies the undesirable effects of the tax: for a nominal increase of one cent in the tax rate there would be a 15,000 ton drop in cargo volumes. This leads to unintended consequences such as increased air pollution, higher energy use, and more traffic accidents.
Dunham refutes defenders of the tax who say it is a “user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. .” A user fee on the waterway would only be justified if the payers of the tax were the only beneficiaries of the waterway, or if the waterway caused some economic harm that was redressed by the tax revenue. Neither of these justifications apply. Just the opposite: the side effects of the waterway are positive. Many related businesses and recreational boaters benefit greatly from the waterway and use it without paying the tax.Share