SIN taxes (a form of a Pigou Tax) are used to discourage the consumption of a good–think pollution. In theory, the taxes are imposed to pay for the negative externalities caused by consumption of that good (damage to third-party property owners in the case of pollution). The revenues are costs are in equilibrium because the costs and revenues are directly related to consumption. As consumption falls, so do revenues.
As a result, sin taxes are, again still in theory, well designed to curb unwanted behavior and increase social welfare, they do not provide a constant stream of revenue. Moreover, sin taxes are typically regressive in nature, the costs of the behavior that the tax seeks to curb are difficult to calculate, and so forth. In short, it is difficult for a tax policy to accomplish the twin aim of supplying a constant revenue stream while curbing the very activity that generates said revenues.
This is the problem facing U.S. policymakers regarding the solvency of the nation’s Highway Trust Fund (HTF), which is funded through the gas tax. As Matt Stone highlighted recently in a piece for the BDN, the gas tax may no longer be the best means to fund the HTF. The reason why is that the gas tax works (whether intended or not) as a sin tax, curbing the consumption of that good by increasing the cost to the consumer. In terms of gas, this means simply driving less with the same fuel inefficient car, or by purchasing a more fuel efficient car. The problem with the gas tax as a sin tax is that the revenues are not being used to pay the costs of the negative externalities caused by the consumption of gas (such as pollution). Instead, they are being used to help pay for the nation’s highways and infrastructure. As a result, as consumption of gas gets pushed down, revenues will fall but use of the highways will remain the same.
Stone points out a potentially better alternative to the gas tax is a mileage tax. Economically*, the mileage tax is fairly straightforward; users get taxed based on miles driven. Under the current scheme of taxing gas, drivers with higher fuel efficiency are taxed less than drivers with lower fuel efficiency even though the two drive the same distance. While switching to a mileage tax from a gas tax would be fairer in terms of taxing users based on usage, a mileage tax is not as effective as the gas tax in terms of creating incentives for drivers to purchase more fuel efficient cars and reduce gas consumption. That ‘unfairness’ of the gas tax is what pushes people to increase fuel efficiency to drive the same distances, or decrease consumption by driving smaller distances. By making the tax fairer by going to a mileage tax, some argue, that incentive is lost.
As such, despite the claims of some, policymakers may be faced with the decision of what the policy aim is; creating incentives for consumers to purchase more fuel efficient vehicles, or funding the HTF.
However, regarding the gas tax vs mileage tax as a binary choice is somewhat myopic, and policymakers might need to take the long-view on this. Regarding incentives for fuel efficiency via the gas tax, at some point those incentives will run out. The incentives created by the gas tax are for consumers who still drive a low efficiency vehicle. That is, the gas tax pushes consumers to switch from their current low efficiency vehicle to a high efficiency vehicle. Once that switch is made, then the incentives are gone, and the gas tax loses its incentivizing advantage over the mileage tax. At that point (where fuel efficiency reaches a high enough level, for instance, 60 mpg), the switch can be made to the mileage tax. Of course, what that level should be is up for debate**.
*The political is issue is how the government tracks miles. The Oregon program requires the installation of a GPS in vehicles to track miles. There are obvious privacy concerns, and this type of program would create enormous political barriers at the national level.
**The gas vs mileage tax is not the totality of the debate on how to fund the nation’s infrastructure. Another idea is to turn funding over to the states and do away with the federal gas tax (read James Pethokoukis’ piece here).