Wholesale Tax on Gasoline a Dumb Idea

There are good ideas, bad ideas, and dumb ideas.

priceofgasoline

I tend to think that most tax ideas proposed by Governor Dayton and the Democrats are bad ideas, but I also understand that the point is debatable.

The wholesale tax on gasoline doesn’t fit into the good or bad ideas categories. It is a genuinely dumb idea.

Liberals and conservatives often disagree about the proper size and scope of government, and its overall effectiveness at achieving its goals. But neither liberals nor conservatives think it is a good idea to doom a government agency to failure before dime one is spent.

Yet that is exactly what the wholesale tax on gasoline is likely to do.

The excise tax on gasoline is imperfect, but it makes planning for spending on roads pretty simple. The demand for gasoline is pretty inelastic, meaning that it remains fairly constant regardless of the price. That means that transportation planners have a pretty good idea of how much revenue will be coming in, and can plan accordingly.

As with all things, the projections aren’t perfect. Gas mileage of the vehicle fleet changes over time, and price spikes have a mild impact on miles driven. But the variation in gas consumption and taxes is far less than most other taxes.

Wholesale prices on gasoline, on the other hand, are wildly variable. In fact, they are far more variable than almost any other product. A quick glance at the price of gas over the past 7 years shows that prices have varied by as much as 260%. In fact, prices have varied that much within a 6-month period.

If we tax gasoline at the wholesale price, the revenue coming in will vary by the same amount.

We saw a similar effect with the motor vehicle sales tax, which for a few years provided a windfall for state lawmakers—until the financial crisis hit and revenues went through the floor. The MVST turned out to be an unreliable source of revenue.

Gasoline is a commodity, and prices for commodities can rise and fall rapidly and in a much more dramatic fashion than most things we buy. Ask corn farmers about variations in the price of their commodity. Or hog farmers. Or mining companies…. That’s why there are futures markets in commodities. There is money to be made betting on the price movements.

The last thing you want to link is the provision of an important, basic service like roads and bridges to the price of a commodity like oil. It is, in a word, stupid.

There are lots of arguments one can make about the proper level of funding for roads and bridges, and of course more controversial services such as transit. We can argue what the best investments are (extra lanes, buses, park and rides, or expensive and underutilized rail transit), and whether we are making the best uses of our limited resources. Those are arguments about what policies are better or worse, and open to vigorous debate.

But as far as I know nobody thinks it is actually a smart idea to link the funding of whatever we decide to build to a funding source that is utterly unreliable.

Doing so is dumb.

With that established, what can Governor Dayton and his staff be thinking? Dayton may be one of our less predictable governors, but he and his staff are certainly not stupid.

We can only guess, but if you take a quick look at Dayton’s other transportation funding proposals you see something quite remarkable. Roads are to be funded with an unreliable source of revenue, the tax proposal for metro transit is based on a more stable funding source: an increase in the regional sales tax.

The Metropolitan Council and the Counties Transit Improvement Board should be as pleased with this proposal at the planners at the Department of Transportation should be displeased with the plan to impose a wholesale tax on gasoline. The sales tax increase for metro transit is a bad idea, but hardly a dumb idea. It will do precisely what it is intended to do, which is to speed the proliferation of rail projects.

One last thing to think about: the current excise tax on gasoline is constitutionally dedicated. There is some dispute as to whether the wholesale tax on gasoline would be similarly protected from being used for other purposes. Excise taxes are typically defined per unit or volume of what is taxed, while sales taxes are a percentage of the price.  Sales taxes based on the price of a product may not be an excise tax as defined in the constitution.

In other words, a future legislature could attempt to tap the wholesale tax on gasoline for other purposes, such as expanding transit funding or other purposes. And given the size of the tax increase—essentially adding 16 to 22 cents a gallon or more in taxes—the temptation to do so will be huge.

Legislators today will of course promise to dedicate the tax, but one legislature cannot bind another. And we already know that the federal government long ago broke its promise to tie the gas tax to road funding. The same would likely happen here in Minnesota, given how hostile some policy makers are to roads.

You can be certain that people in Dayton’s office have thought of that. Today they may be saying: “you can keep your road funding if you like your road funding,” but the promise is empty.

David Strom is principal of Think Write Do, a public affairs consulting firm.  An earlier version of this commentary was published in Politics in Minnesota/Capitol Report