Gasoline tax vs. Carbon tax in Utah: An evaluation

Vijay K. Mathur

In 2011 an attempt was made in the Utah senate to increase the gasoline tax, but it was voted down. Ballotpedia reports that in 2018 state tax on gasoline is 29.41 cents and federal tax is 18.4 cents, for a total tax of 47.81 cents per gallon. Since this tax started in 1923, it has grown at the rate of 3 percent per year. The Utah Legislature passed a law in 2015 that will automatically increase the tax yearly if average fuel price has risen (not to exceed 40 cents, based on “certain factors”).

The gasoline tax issue has been resurrected again in Utah. “Schools Now”, pushing for a ballot measure for school funding in the November elections, agreed to a compromise with the legislature. The legislative resolution passed in 2018 puts the proposition of a 10 cents per gallon increase in the state gasoline taxes to finance roads and indirectly education on the November ballot; it is well established that consumers will bear the total burden of the tax increase. If passed, it is only advisory.

The proposed increase in tax revenue will not be enough to meet the original aspirations of “Schools Now” to fund education. Using U.S. Department of Energy (DOE) data on gasoline consumption in 2016, my estimates show that 10 cents per gallon tax will increase additional tax revenue by $124.69 million in 2018, $127.18 million in 2019 and $129.73 million in 2020, assuming 2 percent growth in gasoline consumption based upon the population growth rate in Utah.

Public education requires a large infusion of resources. Logically, road and education financing sources should be separated. Selective highway tolls is a more logical way to finance roads and highways, with the additional benefit of reduced congestion and pollution. The net effect of the price increase due to the gasoline tax of 10 cents per gallon, the growth in income and fuel-efficient motor transportation may result in smaller additional tax revenue to meet the needs for roads and education.

The best tax, given the heavy carbon dioxide (CO2) air pollution in Utah, is the carbon tax. Since it is a broad-based tax, its burden is distributed among all activities, including vehicle transportation, that emit CO2. Therefore, it has a great potential to raise substantial amount of tax revenues and reduce CO2 at the same time.

Clean air is a common property resource. Therefore, if any activity uses it as a waste repository it should pay the price for the resource. Air pollution due to CO2 emissions results in costly damages to industries and human beings. CO2 tax-price is the market-based solution. An emitter of CO2 will use the least cost strategy to control its emission, and at the same time it has a great potential raise revenues to finance publicly-supported activities such as education.

Professor William Nordhaus of Yale reported, Economist Voice, September 2010, an optimum tax in 2015 prices between $12 and $25 per ton of CO2. It could be increased more if some of the revenue is used to decrease other market distortionary taxes, such as income tax that discourages work or a tax on savings that distorts capital accumulation. It could be adjusted by the inflation rate per year. In Utah annual CO2 emissions from automobiles alone are close to 5.38 million tons, according to the DOE, in 2018, assuming 2 percent growth in vehicles’ ownership since 2016. If appropriately implemented, the carbon tax would stimulate economic growth in Utah due to a cleaner environment.

The carbon tax rate may require some flexibility for changes if CO2 were to be reduced by some targeted amount. Flexibility would reduce uncertainty in markets and hence mitigate some adverse affect of uncertainty on economic activity.

In summary, the gas tax is narrowly focused and only indirectly addresses the issues of CO2 reductions, congestion on highways, and raises meager tax revenues. Besides other features outlined above, the CO2 tax distributes the burden of the tax, lessens the burden if accompanied by reduction of other distortionary taxes, improves efficiency in markets and raises substantial amount of revenues, even if it is only levied on fossil fuels that contribute more than 90 percent of CO2 emissions.

Vijay Mathur is former chairman and professor of economics, emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, Utah.