by Alexis Perrotta, Senior Policy Analyst, RPA
Higher gas prices in recent months mean drivers everywhere are spending more to get around, but these extra dollars don't always show up in the gas tax revenues so beloved by state and local governments. In New York, the higher gas prices give the state more money to spend on transportation projects, education, tax cuts...whatever they like. In New Jersey, the higher gas prices actually mean the state will have less tax revenue ten months before it's due to face a transportation funding meltdown. (Read the RPA report, Putting the Trust Back in the New Jersey Transportation Trust Fund, for more detail).
How can this be? The difference derives from how each state collects the tax. In New Jersey, the state collects a static number of cents per gallon, known more technically as an excise tax. The state gains revenue only when more gallons are sold. Since higher prices usually lead to lower sales, they also lead to lower tax revenue for the state. New York, on the other hand, has a sales tax in addition to an excise tax. It also loses some revenue when fewer gallons are sold, but it gains revenue whenever the price of gas goes up. Gallon for gallon, New York's 8.4% sales tax is collecting more now with the base price of gas near $3.00 than it was a year ago when it was applied to $1.50. (Connecticut has a sales tax at the wholesale level.) Even if prices drop, these trends will be exacerbated as cars become more fuel efficient.
Which of these states has the better system of taxation, not only in terms of raising money in the short term, but in being fair to the public? Stepping back a bit, can their approaches point us to better long-term ways to fund transportation that are stable, fair and versatile?
It's clear that the higher revenue New York is receiving has raised some concern. Some Albany legislators have talked of tempering prices by capping the state sales tax so that it applies only to the first $2.00 of the base price of gas. Others in Albany have suggested spending the 'extra' tax revenue on relief for fixed-income and lower-income households. Meanwhile in Trenton, where lower-than-usual tax revenue can be expected if drivers use fewer gallons of gas, new revenue sources are desperately needed by next summer to keep both NJ DOT projects and NJ TRANSIT afloat. With the third lowest gas tax in the nation, New Jersey legislators might have considered a gas tax increase, or even better, adding a sales tax for gas. However, with prices at the pump as high as they are, many would consider it politically unfeasible to push for a gas tax hike.
In examining such an option, it's helpful to note that there is not a clear relationship between higher gas taxes and higher prices at the pump. First of all, gas and oil companies, in an open market, charge as much as they can to maximize profit, based not only on international and national factors, but more localized factors as well. This helps explain why New Jersey's gas prices are still some of the highest in the nation, even though its gas taxes are some of the lowest. New Jersey drivers, overall, earn more than drivers in, say, Nebraska, where gas taxes are relatively high but gas prices are much lower. New Jersey also receives traffic from surrounding wealthy states that happen to have the highest gas taxes in the nation. Therefore, its prices stay high even as the state receives less and less tax revenue to fund highway and bridge improvements and transit expansion. All this explains why raising New Jersey's gas taxes, perhaps by adding a sales tax, probably would not raise its gas prices by the same magnitude.
It's reasonable to be concerned about the chance of forcing gas prices even higher than they are now. At the consumer level, gas prices have a much greater impact on people who are dependent on their cars for transportation and those with lower incomes. According to the Bureau of Labor Statistics from 2003, those earning less than $20,000 per year spend $600 to $900 annually on gasoline, or at least 5% of their income. Those earning over $100,000 per year, on the other hand, spend about $2,000 on gas, or less than 2% of their income. When updated information is available, it will likely show that the greatest relative impact of the gas price surge has been on lower income household budgets.
More equitable ways of funding transportation can and must be found in the long term. States already use a variety of taxation methods. New York, for example, uses part of a tax collected on real estate transfers to pay for public transportation. Many states, in our region and around the country, use the general sales tax, corporate business taxes, motor vehicle registration fees and a wide variety of other revenue raisers to pay for transportation. But none of these is perfect. Economists often favor replacing the gas tax with a more direct user fee: a cents-per-mile charge, preferably changing by time of day and route to control congestion. This would entail an onboard or odometer-fed device that measures how far you travel and charges you accordingly. The technology is being tested in Washington State. Some highways already effectively work this way. Overhead gantries make it possible to dynamically charge drivers with E-ZPass-like transponders according to how far they've driven; prices are adjusted according to the level of congestion as a means of easing traffic.
Regardless of how we might pay to use our cars and the roads, chances are we will all be paying more in the future. Auto dependence is expensive, and it's hard to find a way to pay for it that's not regressive. That's why it's vital to choose the right investments. This region should focus on improving the accessibility and capacity of its transit-oriented places. There are three large scale projects that would go a long way toward accomplishing that goal: the Second Avenue Subway, a Long Island Railroad connection to Grand Central Terminal, and a new passenger rail tunnel under the Hudson. At the same time, more mixed-use development should be focused on transit villages in towns along train lines in Long Island, Connecticut, the Hudson Valley and New Jersey. We should also be investing in bus rapid transit, shared car programs and other ways to use the existing roads more efficiently. To do all these, states can consider funding mechanisms that generate a pool of transportation dollars that can be used for either roads or transit, wherever the priorities are.
Clearly people would like to live in a place where they don't have to pay so much for gas. But the answer is not to lower gas taxes. As we can see in the table above, lower taxes don't necessarily mean much lower prices, and prices will go up eventually. The answer is to build places and transportation systems where people can live without having to use as much gas.
Higher gas prices in recent months mean drivers everywhere are spending more to get around, but these extra dollars don't always show up in the gas tax revenues so beloved by state and local governments. In New York, the higher gas prices give the state more money to spend on transportation projects, education, tax cuts...whatever they like. In New Jersey, the higher gas prices actually mean the state will have less tax revenue ten months before it's due to face a transportation funding meltdown. (Read the RPA report, Putting the Trust Back in the New Jersey Transportation Trust Fund, for more detail).
How can this be? The difference derives from how each state collects the tax. In New Jersey, the state collects a static number of cents per gallon, known more technically as an excise tax. The state gains revenue only when more gallons are sold. Since higher prices usually lead to lower sales, they also lead to lower tax revenue for the state. New York, on the other hand, has a sales tax in addition to an excise tax. It also loses some revenue when fewer gallons are sold, but it gains revenue whenever the price of gas goes up. Gallon for gallon, New York's 8.4% sales tax is collecting more now with the base price of gas near $3.00 than it was a year ago when it was applied to $1.50. (Connecticut has a sales tax at the wholesale level.) Even if prices drop, these trends will be exacerbated as cars become more fuel efficient.
Which of these states has the better system of taxation, not only in terms of raising money in the short term, but in being fair to the public? Stepping back a bit, can their approaches point us to better long-term ways to fund transportation that are stable, fair and versatile?
It's clear that the higher revenue New York is receiving has raised some concern. Some Albany legislators have talked of tempering prices by capping the state sales tax so that it applies only to the first $2.00 of the base price of gas. Others in Albany have suggested spending the 'extra' tax revenue on relief for fixed-income and lower-income households. Meanwhile in Trenton, where lower-than-usual tax revenue can be expected if drivers use fewer gallons of gas, new revenue sources are desperately needed by next summer to keep both NJ DOT projects and NJ TRANSIT afloat. With the third lowest gas tax in the nation, New Jersey legislators might have considered a gas tax increase, or even better, adding a sales tax for gas. However, with prices at the pump as high as they are, many would consider it politically unfeasible to push for a gas tax hike.
In examining such an option, it's helpful to note that there is not a clear relationship between higher gas taxes and higher prices at the pump. First of all, gas and oil companies, in an open market, charge as much as they can to maximize profit, based not only on international and national factors, but more localized factors as well. This helps explain why New Jersey's gas prices are still some of the highest in the nation, even though its gas taxes are some of the lowest. New Jersey drivers, overall, earn more than drivers in, say, Nebraska, where gas taxes are relatively high but gas prices are much lower. New Jersey also receives traffic from surrounding wealthy states that happen to have the highest gas taxes in the nation. Therefore, its prices stay high even as the state receives less and less tax revenue to fund highway and bridge improvements and transit expansion. All this explains why raising New Jersey's gas taxes, perhaps by adding a sales tax, probably would not raise its gas prices by the same magnitude.
| Rank among states (51 is the highest, 1 is lowest) | ||
| State Gas Taxes (all inclusive) |
State Gas Taxes (all inclusive) |
|
| New York | 51 | 49 |
| Connecticut | 49 | 48 |
| New Jersey | 3 | 45 |
It's reasonable to be concerned about the chance of forcing gas prices even higher than they are now. At the consumer level, gas prices have a much greater impact on people who are dependent on their cars for transportation and those with lower incomes. According to the Bureau of Labor Statistics from 2003, those earning less than $20,000 per year spend $600 to $900 annually on gasoline, or at least 5% of their income. Those earning over $100,000 per year, on the other hand, spend about $2,000 on gas, or less than 2% of their income. When updated information is available, it will likely show that the greatest relative impact of the gas price surge has been on lower income household budgets.
More equitable ways of funding transportation can and must be found in the long term. States already use a variety of taxation methods. New York, for example, uses part of a tax collected on real estate transfers to pay for public transportation. Many states, in our region and around the country, use the general sales tax, corporate business taxes, motor vehicle registration fees and a wide variety of other revenue raisers to pay for transportation. But none of these is perfect. Economists often favor replacing the gas tax with a more direct user fee: a cents-per-mile charge, preferably changing by time of day and route to control congestion. This would entail an onboard or odometer-fed device that measures how far you travel and charges you accordingly. The technology is being tested in Washington State. Some highways already effectively work this way. Overhead gantries make it possible to dynamically charge drivers with E-ZPass-like transponders according to how far they've driven; prices are adjusted according to the level of congestion as a means of easing traffic.
Regardless of how we might pay to use our cars and the roads, chances are we will all be paying more in the future. Auto dependence is expensive, and it's hard to find a way to pay for it that's not regressive. That's why it's vital to choose the right investments. This region should focus on improving the accessibility and capacity of its transit-oriented places. There are three large scale projects that would go a long way toward accomplishing that goal: the Second Avenue Subway, a Long Island Railroad connection to Grand Central Terminal, and a new passenger rail tunnel under the Hudson. At the same time, more mixed-use development should be focused on transit villages in towns along train lines in Long Island, Connecticut, the Hudson Valley and New Jersey. We should also be investing in bus rapid transit, shared car programs and other ways to use the existing roads more efficiently. To do all these, states can consider funding mechanisms that generate a pool of transportation dollars that can be used for either roads or transit, wherever the priorities are.
Clearly people would like to live in a place where they don't have to pay so much for gas. But the answer is not to lower gas taxes. As we can see in the table above, lower taxes don't necessarily mean much lower prices, and prices will go up eventually. The answer is to build places and transportation systems where people can live without having to use as much gas.
@RegionalPlan