Thursday, May 24, 2007

Indiana Gas Tax Suspension?

No. Absoultely not. Sound funny coming from a Libertarian? Read on.

Gas taxes are a user fee. If you are using gasoline, you are most likely using the roads. Sure, some of this gasoline is used for lawn mowers and other non-road uses, but that just goes to show you how one-size-fits-all solutions invariably are imperfect.

Here's the main thing about gasoline: The commodity belongs to the people who produce it, until it is sold to the people who agree to buy it at a particular price. Frankly, I don’t believe the producers of gasoline have nearly as much to explain for the variable nature of day-to-day prices as consumers do for their ability to wail and moan without doing a single thing to alter their consumption.

In economics, the phenomenon is called “price elasticity”. In the case of gasoline, the price is highly elastic: it is being shown that consumers are willing to buy the product without regard to price.

It was eye-opening for me to sit in an economics class seven years ago and watch the professor give an impromptu demonstration of price elasticity. The class was mainly comprised of working professionals pursuing an MBA. At the time, gas was about $1.40/gal. He had everyone stand up. He said, “gasoline is now $2/gallon. Sit down if you stop buying”. Nobody sat down. “$3/gallon”. A small handful of people sat down. He increased at $1 increments, and at $6/gallon, almost half the room was still standing. I was also still standing.

In that light, it is entirely possible that gasoline is actually underpriced, and has been for years. The market is bearing these prices, all while being decried as ‘outrageous’. Actions speak louder than words. Truth be told, if gas goes to $8/gallon, I'll still be buying and driving

Also interestingly in this class, there was a group that did their price elasticity project on bus riders. The fare was $1/ride with transfer. They found by surveying actual riders that their average rider surveyed would continue to ride the bus up to about $4/ride.

The conclusions we reached were that people made choices that caused them to be dependent upon transportation. Mainly, they choose to live far from their workplaces.

I have no sympathy for the person who choose to buy an SUV when gas was at $1.80/gal on the assumption the price would never rise, or who argues that because they made that choice, the oil producer and retailer owe them an ever-flat price. Likewise for the person who works downtown and lives in the city. You helped create sprawl? Suffer your commute and its costs!

We are such a society that wants to have its cake and eat it too.

So, to the point- no, the governor shouldn’t suspend the gas tax. The taxes pay for the roads. Saying one is in favor of suspending the gas tax is saying they favor the roads crumbling while promoting their use of them. Short-sighted foolishness.

Doug Masson explains his opposition to suspending the gas tax saying, "that would amount to the State subsidizing oil company profits". I disagree. Suspending the tax would subsidize the choices that make higher prices uncomfortable, such as driving an SUV if you can only marginally afford to do so; or, such as living 40 miles from work.

Price has a function. Higher prices will make people more interested in alternative fuels, smaller vehicles, living closer to work, and walking more.

Don't bemoan the oil companies for selling to willing buyers at any profit margin. Would you bemoan your customers choosing to do business with you at your price? Or, your employer to hire you at your wage?

Get a grip, folks.


Anonymous said...

Could this be the next poll question?

Todd S. said...

Good post, but I think you got the economics point backwards. Generally speaking, gasoline is an inelastic good. (The Wiki article you link to mentions this as well.)

Mike Kole said...

Todd- this is why you are State Chair. Inelastic. Not elastic. Right you are!

Michael said...

Indiana imposes 2 taxes on gasoline consumers. The standard 18 cent gas tax and the sales tax. With prices hovering at $3.50 a gallon people are paying an additional .21 a gallon. That tax is not a user tax and should be disposed of. All it is is a revenue generator for the state, not a user fee, which I can almost agree with (if the funds actually went where they were supposed to go).

Jeff Pruitt said...

The sales tax on gasoline should be abolished (as the Democrats pledged to do but then failed to actually do).

As gasoline prices go up the state rakes in more money - this is much different than the gas tax you discussed which is a flat fee per gallon. In the salex tax case, higher prices are the equivalent of a tax increase...

Mike Kole said...

Michael & Jeff- You both point out info I was not fully aware of: the two-taxes-on-gasoline situation.

I fully agree that one of the taxes- the sales tax- should be abolished. The flat tax should remain, for the purpose of funding the roads. And yes, Michael, absolutely, the funds should go strictly where they are supposed to go.

So, what's with the Democrats? They made a pledge that was sure to be popular. Why do you believe they failed to follow through? For my money, I believe they are addicted to the spending. Not saying Republicans aren't. They are. But is it simply that Dems believe they will be well thought of just for talking the talk without having to walk the walk?

Jeff Pruitt said...


You are right on the money - they lack the will to cut spending in the necessary areas to abolish this tax. It truly is an addiction. I blogged about this at the time (partially copied below):

"This was a golden opportunity to eliminate a tax that is a burden on working class Hoosiers. They also had an opportunity to put the republicans on the defensive by making them go on the record by voting against the repeal of a tax.

Like financial junkies, at the end of the day they just couldn't break the habit. They NEED those tax dollars. Any effort to see where they could reduce spending or find another creative solution? Nope."