Region Forward Blog

The (other) role of a tax: Incentivizing sustainability

May 19, 2011
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Taxes are designed to two things: 1) to raise revenues to fund the government and/or to 2) incentivize a desired change in behavior. Part one is obvious. The government provides services such as public education or national defense that costs money and it collects taxes to cover those costs. That’s fairly straight forward. Of course it’s the politics – the what and how much government does – that gets tricky but that’s another topic.

Part two should be almost as obviously logical. Most people and companies want to reduce their tax burdens if possible. Therefore if a tax is imposed on an item or an activity it’s expected that the rate of consumption of or participation in that activity will decrease. That’s exactly what happened when the District put in place a 5 cent tax on plastic bags over a year ago. The bag tax was aimed at reducing pollution in the Anacostia River by encouraging people to use reusable bags. And that’s exactly what happened. Seeing the policy’s success Montgomery County adopted an even broader bag tax earlier this month.

However if a tax that is aimed at reducing a certain behavior is a success the revenues it collects will decline over time. Fewer people using plastic bags = fewer taxes collected on plastic bags. If the primary purpose of a tax is behavioral change that’s how you define success as the BeyondDC blog pointed out recently.

This logic works with tax credits as well. The federal government as well as many states encourages people to buy hybrid cars by offering a large tax credit for doing so (which can be used to counter any higher costs of hybrid cars versus their gasoline counterparts). The hybrid car tax credit leads me to discussing an innovative proposal for replacing the gas tax that has gained traction over the past few years: taxing cars by the mile not the gallon.

As cars become more fuel efficient and as hybrid and other alternative energy cars become more prevalent revenue from the gas tax inevitably shrinks. One solution is to simply raise the gas tax but that has unfortunately become such a politically poisonous issue that alternative policies have a much better chance at seeing the light of day. Taxing cars by the mile as was noted in The Hill recently will “better align highway costs with revenue generation and promote the more efficient use of the highway system.”

A tax-by-mile plan will raise more revenues than the stagnant gas tax (in the short term) and spur folks to reduce the amount they drive (in the long-term) thereby encouraging alternatives to auto transport such as transit walking and biking. That’s how a tax with sustainability as its goal can be a catalyst for change.

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