From the blog of Greg Mankiw, a Harvard economist and former Bush administration official who thinks he can teach the Governor-elect some basic econ:
Deval Patrick is no Pigovian
A reader emails me a story about the new Massachusetts governor:
GAS TAX HIKE CLASHES WITH TRANSPORTATION, ENERGY GOALS, PATRICK SAYS
By Michael P. Norton and Jim O’Sullivan
STATE HOUSE NEWS SERVICE
BOSTON, WEDNESDAY, DEC. 20, 2006
Raising the gas tax, an idea contemplated by a state commission eyeing ways to address a huge backlog in transportation maintenance problems, runs counter to the push for energy efficiency and independence, according to Gov.-elect Deval Patrick, who nonetheless backed off a campaign pledge against such an increase.
“We need to be much, much more efficient in the use of hydrocarbons for energy reasons, for reasons of independence, for reasons of our dependence on foreign oil and gas, on hydrocarbons generally,” Patrick told the News Service during an interview at the waterfront law office he is using as a staging area for his administration, which moves into power on Beacon Hill in two weeks.
“If we’re trying to cultivate here in Massachusetts an energy-smart economy, then the notion of relying for additional revenues on something we’re trying to break our dependence on doesn’t seem to me to be a formula for long-term success.”
Okay, let me get this straight: It is important that we reduce our consumption of oil. Therefore, we should not tax it.
Hmmm….Governor Patrick was Harvard class of 1978, and it’s a good bet that he took ec 10. I wonder what they taught about the slope of demand curves back then.
Um, sorry Professor, but you didn’t “get this straight” at all — actually, you totally missed the point. Neither Patrick nor any other rational person would argue against the general proposition that hiking the gas tax would decrease consumption — of course it would. What Patrick is saying is quite a bit more subtle, and bigger picture, than that. He’s saying that, to the extent we are dependent on the gas tax (particularly a hypothetical increased gas tax) as a means of paying for essential infrastructure needs, we have backed ourselves into a political corner: we can’t vigorously seek to reduce our dependence on gasoline through development of alternative energy sources and expansion of public transit (good ideas for lots of reasons) without causing gas tax revenues to dry up, thereby making it more difficult to deal with that “backlog in transportation maintenance problems” that the SHNS article mentioned. It’s like the problem we have with the lottery. State-sponsored gambling isn’t all that great a way to underwrite local aid, but we’re so dependent on it now that any effort to scale back the lottery would create a fiscal crisis, so it’s off the table.
Get it?
Furthermore, though I’m no “economist,” I do know that some commodities show more “price elasticity of demand” than others — that is, for some commodities, raising the price causes demand to drop quickly, and for others, it drops much more slowly. Strikes me as likely that gasoline is in the latter category, at least in the short to medium term. Which means that if you hike the gas tax, you get a small reduction in gasoline consumption, and a large tax increase on people who buy gas — and, since like all sales taxes the gas tax is regressive, it will fall heavily on lower-income folks who can’t stop driving to work just because the gas costs more.
Now, of course, you can overcome a non-flat but not-very-elastic demand curve by jacking the price through the roof. So we could practically eliminate gasoline consumption in this state by all but the very rich by hiking the gas tax to $50 a gallon. From a supply-and-demand perspective, that’s a perfectly sensible thing to do if you want to cut down on gasoline consumption. But of course, it would be politically impossible, and it would also be extremely undesirable for reasons that you probably can’t find in the Ec10 textbook.
All of which is to say that Patrick’s comment was about a lot more than demand curves. It was about big-picture politics and policy — the kind of stuff that Governors have to deal with. Maybe Professor Mankiw should stick to economics, as politics doesn’t seem to be his strong suit.
You’d argue that the Mass Cigarette tax, and its $10 million per month revenue, was a policy mistake?
If you want to cut down on people buying cigarettes, it’s great policy. If you want to use the cig tax to fund things, it carries the obvious risk that the demand curve will actually be proven true and people will stop buying cigarettes, thereby depriving you of revenue you were counting on.
The policy behind cigarette tax is pretty clear from the link I provided. It’s two-fold: 1) funds for new health and education programmes which cuts down on smoking 2) some extra cash for General Treasury.
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I don’t see the difference.
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Tax cigarettes, smoke less, cleaner air, loss of government revenue when people stop smoking.
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Tax gas, use less, cleaner air, loss of government revenue when people use less gas.
But what is your point? I didn’t hear David championing the cigarette tax?
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Are you arguing for a raise in the gas tax?
I’m surprised that Patrick is dismissing the idea of a gas tax. After all, it’s completely in line with policy that Patrick alleges is intended to reduce dependence on foreign oil and hydrocarbon.
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Patrick crafted a pure political answer that allows him to be a conservationist, yet against additional gas tax.
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His reason for opposing a gas tax (that the revenue source will disappear as hydrocarbons are phased out) is rediculous. I have great faith in politicians that if one tax is phased out, another one will replace it.
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If additional gas tax is such an inappropriate tax, why not reduce the current tax before the Commonwealth becomes dependent upon it?
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My point with the cigarette v. gas tax analogy, is that if the cigarette tax was a good idea, why not gas tax? There’s little difference.
I agree that there is little difference between the two. I’m not a big fan of taxing people into “good” behavior.
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Agreed again and to me it sounds (perhaps idealistically) like this is part of the reason he doesn’t want to do it. I’m willing to give him the benefit of the doubt until proven otherwise.
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So the choice must be to make it worse or get rid of it? Sounds like a great poll question.
that Deval has basically taken the gas tax off the table.
Unlesssss
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He is setting it up so the legislature looks like the bad guys and we get a gas tax.
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How Romneyesque
for a few reasons.
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1. If the gas tax results in less consumption of gasoline (and, if only marginally, it does), then the state can do the following: Increase the taxes as efficiency goes up, resulting in a constant revenue source. What do I mean? I’m making up numbers, but go with me:
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2006 average MPG: 20 gas tax: $1.00 result: $1.00 per 20 miles driven
2007 average MPG: 21 gas tax: $1.05 result: $1.00 per 20 miles driven
2008 average MPG: 22 gas tax: $1.10 result: $1.00 per 20 miles driven
2009 average MPG: 23 gas tax: $1.15 result: $1.00 per 20 miles driven
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you catch the drift? The number of miles people drive is fairly inelastic — so as society gets more MPG, you just raise the gas tax to keep the total revenue the same. This causes people to constantly demand more efficient MPG vehicles, because every year that goes by they’re paying more in total taxes for the same number of miles driven. This is great policy because it is largely predictable, it allows people to have influence on how much tax they pay, it encourages good behavior, and the revenue side is constant.
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How will you calculate the average MPG? Well, you could use the motor vehicle registration as a first approximation. Of course, the simple average doesn’t account for some vehicles driving more miles than others, but there’s another method: measure how many gallons of gasoline are sold — which is already done by weights & measures and/or by the MA tax man. So, the numbers are accessible. Coupled with the potential tUSA increase in CAFE standards and high gas prices/environmental consciousness providing a boost in high MPG demand, this policy results in steadily increasing gas tax that is correlated with the increase in MPGs of the state’s vehicles.
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State revenue is constant.
Average tax paid is constant.
MPG steadily increases.
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Is it politically feasible? I don’t know. Do the economics hold up? You betcha — and it eliminates DP’s claim that the state would be relying on a revenue stream that it’s own policies are forcing to evaporate.
it isn’t really responsive to the point of the SHNS article. As I noted downthread, the question Patrick was addressing is whether boosting the gas tax is a good way to fund a backlog of transportation infrastructure projects. If you’re going to use the gas tax to do that, you need more flexibility than your formula would allow, don’t you? In other words, if you want to keep the gas tax sort of neutral in the way you propose, you are greatly limiting your ability to use it as a way of boosting revenues. Sure, you get to hike it a little bit as MPG goes up, but you never get the big pile of cash you need to fix all those tottering bridges.
Let’s say (again, making up numbers) that the gas tax currently provides $100,000,000 in revenue, and that requires a gas tax of $1.00 per gallon. If we instantly up it to $1.50, we’re now getting $150,000,000 — and we can take that $50,000,000 and apply it to capital projects. What’s more, with a disciplined lege that will keep the formula I proposed above in effect, you could easily bond a much larger amount, adn use the $50,000,000 (extra) to pay it back, while maintaining the $100,000,000 to fund whatever it is you’re funding.
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Remember, as the MPG increases you don’t lose revenue because you can simply increase the gas tax per gallon.
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Don’t dwell on the actual numbers — I pulled ’em from my buttocks. Focus on the idea, that you can maintain a constant revenue, including a new “boost” that could be bonded against.
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P.S. Wise investment would also fund some MBTA capital improvement projects that have been on the back burner. Make the T better and fewer people drive — which results in less wear and tear on the road infrastructure, which allows an even longer delay to fix ’em.
gas (yes, it’s aways off) is no longer used for cars? Say hydrogen fuel cells or some new technology replaces gas. Do you tax this new environmentally friendly fuel?
The government taxes income. Income’s environmentally friendly.
income generation?
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If that isn’t a triple word score opening…
Patrick did not run to reduce gasoline consumption at any price. He has other priorities and must pick his battles carefully. So I agree, if that is your point, that it would be a mistake for him to seek to raise the gasoline tax.
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However, you are wrong to characterize demand for gasoline as inelastic, and a tax that captured some or all of the environmental externalities associated with extracting, refining, transporting, and using gasoline would confer real economic benefits greater than its costs.
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Moreover, a Pigovian tax that was returned to taxpayers would be revenue neutral. Suppose, for instance, that all revenues from a gas tax were distributed per capita in the form of a credit on electric or gas bills. There would be winners and losers, but no new net revenues, and both prices and consumption would in fact be better aligned with costs. This would be good public policy any way you slice it.
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So you are right on the politics–who wants economists running the government?–but wrong on the economics.
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I believe there are opportunities for Pigovian taxes that would be both politically palatable and good public policy, but that is another story.
first of all, why am I wrong that demand for gasoline is inelastic? I never claimed that it’s completely inelastic (i.e., perfectly flat demand curve), but I did say — and cited several sources — that it’s considerably less elastic than some other commodities. Do you think that’s incorrect? If so, what’s your basis for saying so? It seems perfectly sensible to me, and the sources I cited think so too.
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Second, your point about “a Pigovian tax that was returned to taxpayers,” while interesting, is off-topic. The topic under discussion in the SHNS article was whether it’s a good idea to think you can fund a backlog of infrastructure maintenance projects by increasing the gas tax. Patrick’s point, and the point of my post, is that there are good reasons not to think that you can, one of which is that he wants to reduce demand for gasoline anyway. Whether an increased gas tax could be beneficially used as a redistributive mechanism along the lines you suggest is an entirely different kettle of fish.
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Of course, the closer a person is to a train/bus/subway station, the more elastic that curve becomes. The same can be said for folks who live close to auto rental and zip car locations, since people who get rid of their car for temporary rental do in fact drive fewer miles overall.
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So, I’d argue that the demand curve for folks who live in Boston proper is not nearly as flat as those who live in most of tUSA — and in Western MA. Of course, more MBTA expansion, smart growth initiatives that result in higher pockets of density, safe affordable housing in dense neighborhoods, and high bandwidth roll-out allowing for telecommuting will all help to make those flat demand curves a bit more sloped, which will help reduce total consumption of fuel in the long run.
For elasticity of demand for gasoline, I generally rely on the work of analyst and activist Charlie Komanoff. Among other things, he adjusts the data on gas consumption by economic activity, which is pretty important. An accessible introduction to his work, with links, is available here.
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Demand for gasoline probably is “considerably less elastic” than that “for some other commodities.” (But David, how did that “some” sneak in there?) Should we care that demand for gasoline may be less elastic than demand for, say, fresh tomatoes?
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And why should short-term elasticity (which is usually less than long-term) count much in this case, since global warming is a long-term problem?
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In any case, your own sources, stripped of spin, contain plenty of support for the assertion that demand for gasoline is elastic-that price affects use.
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I apologize for being off-topic on Pigot, but was misled by the title of the article that you were refuting, “Deval Patrick is no Pigovian.” (I think you may have been a bit off-topic in your critique, since as far as I can tell the author is not in fact advocating a tax on gasoline to pay for road repair.)
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Please note I am still not saying that Patrick should hike the gas tax–he has many other important priorities, and a tax hike right off the bat would be poison. But I hope that support for these priorities does not obligate me to pretend that an increase in the gas tax would not affect consumption of gasoline and have positive net benefits.
Should we care about how elastic the gas demand curve is? Absolutely we should, because that tells us both how much revenue we can expect from hiking the tax and how much it will cost people who can’t really afford it. So yes, it matters.
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As for who’s off topic about what, the basic point of my post is that Mankiw either willfully or carelessly misrepresents what Patrick was talking about. Does Patrick understand that if you increase the gas tax, consumption will go down to some degree? Of course he does, as does everyone else, so the suggestion that Patrick doesn’t get that is a total straw man, and unworthy of a Harvard econ prof. (It is more worthy, perhaps, of a former Bush administration official, but that’s another discussion.) My point, and yours as well, I think, is that political realities and policy goals, not demand curves, are what led Patrick to say what he said.
Read his statement. Very clever.
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Mr. Patrick has managed to cobble together a policy that makes it clear he’s an environmentalist (energy independence, blah, blah) yet against gas tax–a tax that’s efficient, simple and politically DOA.
you and I mostly agree on this. It’s Mankiw who apparently doesn’t get it (unless he was just looking for a cheap shot). Like I said, politics ain’t his strong suit.