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State tax changes

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Governors in Louisiana and Kansas are considering ending the state income tax. I'm a Pigouvian, so I approve: one wants taxes to have as few negative distortions as possible, and that means taxing undesirable or unavoidable activity, not productive activity.

Unfortunately, Virginia's governor is proposing to go in the opposite direction, proposing to replace its 17.5-cent/gallon gasoline tax with a 16% increase in the sales tax. That's exactly backwards. While consumption taxes are generally preferable to income taxes, it's far better to focus those taxes on activities with negative externalities—like driving. Virginia roads, especially in the Washington, DC, suburbs, are already among the most congested in the nation. (New subway lines will not do much to fix the problem, because the Metro is already at capacity in the number of trains that can cross the tunnel and bridge across the Potomac River; moreover, Metro refuses to adequately shift load through more aggressive peak-load pricing, meaning many people refuse to take the Orange Line during rush hour because they cannot be assured of even getting on.) The only time in my eleven-plus years in Northern Virginia that I have not seen the roads completely mobbed well before and after normal rush hour was in the immediate aftermath of Hurricane Katrina, when gas prices briefly spiked to nearly $5/gallon. People respond to incentives, and if gasoline prices go up, they will shift to carpooling and shorter drives at the margin. Reducing gasoline taxes will increase congestion, and spur more spending on road-building, a double-whammy, and that's not even counting the externalities of carbon emissions, which at a minimum lead to unpleasant smog.

Virginia plans to collect about $1 billion in gasoline taxes and $11 billion in income taxes. Why not make the ratio 1:1 instead of 1:11? Cutting the income tax rate in half, as Maryland raises its own rate and nearby DC has among the highest rates in the nation, would spur even more wealthy people to move to Virginia from Maryland and DC (and increase Virginia property values) meaning that the revenue loss would not be anywhere near 50%; raising the gasoline tax to collect $6 billion (even as it would need to be increased by more than 6-fold to compensate for lower gas purchases) would reduce road congestion, increase Metro usage (and thus Metro revenues), and thus decrease highway expenses. Win-win-win.

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

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The Manhattan Insitute's Center for Legal Policy.