Tuesday, March 31, 2009

Gas Tax - Group 4

The gas tax in Minnesota is a per-volume tax, with the rate paid dependent upon the quantity sold, not its value as in an ad valorem tax. Effective January 1, 2009, Minnesota’s gas tax rate (exclusive of the federal rate) is $.26/gallon. This puts Minnesota's rate below Wisconsin’s ($.329/gallon), but above the rates in Iowa and the Dakotas ($.22-.24/gallon). The state with the highest gas tax is New York, at $0.413 per gallon, and the state with the lowest is Alaska, at $0.08 per gallon. For more information on other state tax rates, please see:

As a basic good for consumers with few substitutes, gas is understood to be fairly inelastic in terms of demand. Taxing gasoline consumption is fairly economically efficient, as the increased price will not greatly affect consumer behavior. In terms of equity, however, the gas tax is somewhat a mixed bag. By the benefit-received principle, it is widely accepted in modern public finance theory as a sound tax policy that the quantity of fuel used by a consumer is directly linked to the extent that consumer makes use of the road system, both in terms of distance traveled and in terms of size of vehicle. On the other hand, the ability to pay principle demonstrates that the gas tax may be regressive. Indeed, as an excise tax, the gas tax consumes a larger percentage of a lower-income person's income than a higher-income person who purchases the same quantity. The argument is muddied when assumptions are made about personal driving habits (higher-income people driving more, higher-income people owning less fuel-efficient cars, etc.). Such arguments fit more discretely into horizontal equity situations.

The State's gas tax was raised in the 2008 legislative session, a process that included a bipartisan override of Governor Pawlenty's veto. For more information on the bill's details, please see the following:

As a revenue source earmarked for highway construction/maintenance work, declines in gas tax revenues are highly visible. There existed such political power to override the governor's veto because previously the tax had not been raised since 1988:

As a per volume (not ad valorem) tax, the state's gas tax does not provide consistent revenues and may not keep pace with inflation. Because of this, road improvements and other gas tax-funded activities have not kept pace with demand. In place of frequent, pitched political fights over raising the tax, some states have succeeded in indexing the tax to demand and inflation, providing consistent revenue generation:

Wisconsin had such an index in place until it was repealed in 2006. The repeal was the result over discomfort in automatically adjusting (raising and lowering) taxes:

These fights over indexing and raising the tax (as in Minnesota) demonstrate the low political feasibility of raising the tax. Even given this, the visibility of the tax is only high when politicians bring it to the forefront. Otherwise, changes in the tax are masked in the price volatility that consumers experience. See the following for a write-up on oil's price volatility:

Bjorn Arneson, Andy Hughes Laura Seifert, Margaret Van Heel, Haoping Wang

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