Time to raise the gas tax?

A much higher gasoline tax may currently be a political conversation stopper but fortunately it doesn’t stop conversation in economic policy.   Enter Joel Wood’s paper about higher gasoline taxes for Toronto which appears in the latest issue of Canadian Public Policy/Analyse de Politiques (which I am promoting here as the new editor). Joel also has a summary piece in the National Post.

See his key Table 4. Joel calculates an optimal gasoline tax of 41 cents per litre for Toronto, compared to the current 25 cents. Of the 41, about 11 cents is the straight Ramsey tax that would be appropriate if there were no congestion or pollution. Of the remaining 30 cents, about three quarters of it is a congestion toll (including the effect on road accidents) and the remainder is the optimal pollution tax.

Joel’s analysis is short-run in the sense it doesn’t matter whether the increased gasoline tax revenue is used to cut income taxes or provide transport infrastructure. And of course higher gas taxes are not a perfect substitute for tolls. For example there are boundary issues in having a gasoline tax higher in Toronto than the rest of Ontario. A tax gradient around the Toronto borders might be a fix.  (If, however, the Ontario tax has to be one-size-fits-all, Joel calculates that just over the current 25 cent per litre tax is pretty close to optimal.)

Consider the rival policy that has recently been proposed in Ontario: high occupancy and toll lanes, tolls on drivers without passengers who are using lanes that are otherwise restricted to drivers with passengers on some parts of some highways. Higher gas taxes would be much simpler and probably more effective while we await the tolling infrastructure that I hope will eventually come.

 

This post was written by Mike Veall, Editor of Canadian Public Policy

Comments

[Tel]

If you are attempting to use fuel tax to solve traffic congestion there are a number of problems.

Fuel tax imposes a higher penalty on people driving long distances, often outside the cities, and these people have no effect on congestion (also very little measurable effect on pollution).

Fuel tax imposes a higher penalty on transport of goods, thus increasing supermarket prices, adding directly to CPI. Often these trucks will avoid peak periods anyhow for obvious reasons.

Fuel tax imposes a higher penalty on heavy machinery used by agriculture, mining, construction, demolition, etc. If you give rebates on any of this then you will get cries, "Oh, oh, the mining industry is subsidised, how can that happen?"

The real reason we are seeing a push for higher fuel tax is "because we can". While oil prices were high we got a good estimate that people will pay, and now it seems a terrible shame (for governments) to see those people not paying quite as much. Everything else is justification to fill in the back story and provide plausible sound bites for the nightly news.

[Jim Rootham]

Every litre of gasoline burned puts out about 3 kilos of CO2*. That is not a little effect on pollution. Unless, of course the above analysis ignores greenhouse gases.

*Gasoline is largely short chain hydrocarbons. The mass of these is dominated by the carbon content. A litre of gasoline is about 1 kilo. The atomic number of carbon is about that of oxygen (a little less, actually), so a CO2 molecule is about 3 times the weight of a carbon atom. None of this is exact, but it's only off by a few 10's of percents.