Democrats Must Embrace Elimination of Gasoline Sales Tax - Part 1: A Policy Perspective
Posted by Jeff Pruitt - 7/7/08 @ 12:08 am - Filed Under Featured
Once again state Democrats are missing a golden opportunity to promote good policy and winning politics - a rare combination indeed. I say once again because who could forget the property tax reform debate earlier this year where state Democrats came up with absolutely nothing and ceded the entire debate to governor Mitch Daniels.
Their cautious approach bolstered a relatively weak governor and made the forthcoming property tax reduction every homeowner will see on their bills synonymous with the phrase “Daniels Property Tax Cut”.
But now Democrats have a new opportunity; one that could change the narrative on Daniels and all they have to do is rally behind Jill Long Thompson’s plan to suspend the sales tax on gasoline. I probably don’t explore specific policy initiatives as much as I should here at FWP but this one is important and Democrats need to figure that out before it’s too late.
So I’m going to dedicate two posts explaining not only why eliminating the sales tax on gasoline is sound public policy but also, more importantly for political junkies, why it’s winning politics. Let’s start with the policy aspect.
I was critical of both Democratic gubernatorial candidates earlier this year for not proposing their own property tax reformations and I still think the lack of any substantive policy position on this issue is now the #1 obstacle Democrats must overcome to take Daniels down. Clearly this is a formidable task but Jill Long Thompson’s idea to suspend the sales tax on gasoline could help do just that. Of course state Democrats, never seeing an opportunity they couldn’t waste, seem lukewarm towards the plan at best.
Let me first say that a suspension of this tax does not go far enough. Long-Thompson and state Democrats need to come out forcefully for the full repeal of the sales tax on gasoline. Now the obvious, and probably only, criticism of this plan will be - “How do we pay for it”? The not-so-obvious answer is - “We don’t have to”. Now long-time readers will know that I have nothing but disdain for supply side economics and so my position here might seem contradictory but it’s not.
One would think that since the price of gasoline has skyrocketed, the state would be raking in a tremendous amount of new sales tax revenue. However, the truth is that sales tax receipts are not increasing. The Journal Gazette provides the data:
With prices near $4 a gallon, the conventional wisdom is that Indiana is making millions on gas purchases.
While gas sales taxes are up, most other sectors are growing at a slower rate than during the same period the previous fiscal year. And several industries are seeing an overall reduction in sales tax revenue, including home improvement and furnishings stores and apparel stores.
Overall, the state is $20 million under forecast in sales tax collections for the fiscal year.
Now this data actually makes perfect sense when one stops to think about it. There’s a fixed amount of income and as gas prices go up that leaves less money for consumers to spend on other goods. So if we were to eliminate the gas tax that would free that money up for consumers to spend in other areas of the economy.
This money will help diversify consumer spending which in turn helps to create and retain jobs. Make no mistake - consumers will spend the money right now and the sales tax from those new expenditures will make up for the missing revenue from gasoline. Thus the state will not have to deal with a “budget shortfall” as critics will decry.
That really is the gist of the debate - one side will claim we will lose a tremendous amount of revenue and call it political pandering. Of course they will have absolutely zero data to back up their position. Democrats need to stick to the data and hammer this policy home. The message needs to be that eliminating this tax will put more money into consumers’ pockets to spend on items outside of skyrocketing fuel prices and it will also be revenue neutral to the state.
But before state Democrats can stay on message they must get on message and right now they are just not there. But if the policy aspects aren’t convincing enough then perhaps the political argument will bring them around. That’s up next…
(Photo by Charlotte Weybright of Berry Street Beacon)
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Jeff: Perhaps another point that needs to be made is- I believe the gas tax is not based on the amount of the sale but the number of gallons pumped. And…. Yes, you’re right. If the Democrats don’t get on and get it right, it will be even more difficult to “Ditch Mitch”.
On a national level, it seems the administration’s “tax incintive” has failed to do much for the economy. Hummm.
[...] Part 1 I covered the basic idea of suspending the gasoline tax and how it would not only benefit consumers [...]
Jeff,
I’ll concede the political side of the argument (your part 2), but I think it’s meaningless (but probably effective) political pandering, with unintended consequences, whether it is John McCain or Jill Long tugging at our baser instincts.
But first, let me welcome you to the “supply side.” As you write: “This money [dollars saved by consumers if gasoline sales tax is eliminated] will help diversify consumer spending which in turn helps to create and retain jobs.” Yes, yes, yes. And the same is true regardless of the tax. Extra money in a consumer’s pocket spends the same regardless of which tax break put it there.
As for cutting the tax being a revenue neutral act- I doubt it. You are very correct that some of the lost sales tax will be picked up erlsewhere, but how much depends upon elasticities of demand and (in this increasingly wired and inspired country) internet sales, where no sales tax is collected. Look at the JG article youcited. Revenues are down big in apparel and home furnishings. When times are tough (and they are tough for more reasons than high gas prices), it is easiest to defer purchasing the new dining room table and relatively easy to defer updating you wardrobe. Demand for gasoline is much less elastic (less boating on Lake James, but getting to work remains the same) than these two items, and it can’t be purchased over the internet.
Fuel prices are up (and are going to continue to go up) largely because global demand is way up. Watch for Ted Koppel’s special on energy demand in China for a great example. The third world isn’t going to stay poor, and making all the products that we buy requires more energy to run factories and transport goods, mine and transport raw materials, etc., even while labor costs remain a fraction of those in the US.
The American answer (if government doesn’t screw it up) will be the engine of private sector innovation bringing transportation costs back into line regardless of where gasoline, natural gas or electricity prices go. It’s staring to happen now in ways large and small.
There is no particular price per gallon (long term) wher people become outraged or suffer too much. Gas could be $10 per gallon, but I’m ahead if I can comfortably lead my life using a fourth of the gallons I used to use.
Obama has it half right in rejecting gimmicks to shield the consumer from the reality of the market (which only delays the inevitable and slows down innovation), but all wrong siding with the no drilling, no nukes, no new refineries, no growth crowd. So far as I can tell, Obama’s only answer is “If we take enough in punitive taxes from the nasty oil companies, government research will come up with something the environmental movement isn’t already opposed to and solve the problem.
McCain is correct in at least giving the states the right to do offshore drilling, but I wouldn’t wager a nickerl guessing what he actually believes or will actually do. He is pandering mercilessly and it may well work, particularly if Obama offers nothing but the “Americans shouldn’t expect to live as well as they have but government will create a solution that I can’t begin to articulate right now” approach.
There are exciting times ahead if government resists the temptation to meddle too much. New industries will be created, new technologies developed, new patterns of housing and living established. Our success will be in being the first and the best in addressing these issues.
Let me give you a few examples: Many Fort Wayne employers are considering implementing four day, 10 hour work weeks, because the fuel savings now offset other costs. Larger companies are using the internet to connect up workers for car pooling. European style “metro cars” are starting to appear in our cities. No sudies, no taxes, no government programs required.
There are several issues where Jeff Pruitt and I disagree; however, this may be the first time we disagree about math!
First of all I agree with some of the tenants of Supply Side Economics; however, I do not agree with all of them.
I do agree with the spending patterns Jeff Pruitt explained in this post; however, I strongly disagree with Jeff’s conclusion that there would not be a large revenue shortfall due to eliminating the Indiana sales tax on gasoline.
In my opinion he is completely wrong; there would be a large revenue shortfall if the Indiana sales tax on gas were repealed.
It is a proven fact that most Americans currently spend a pretty constant amount of money each year. This amount may change based on changes in income or unusual expenses; however, spending is relatively constant.
Jeff’s conclusion that there will not be a revenue shortfall if the Indiana sales tax on gasoline is eliminated is best proven incorrect with an example.
The average single American with no dependents currently consumes about 500 gallons of gasoline per year. So lets look at the spending patterns of Bob, a single Hoosier who uses 500 gallons of gas per year.
If the average price of a gallon of gas in Indiana next year is $4 per gallon INCLUDING the Indiana sales tax of 7% then Bob will spend $2000 on gas in 2009. Bob will pay a total of $130.84 in Indiana sales tax on gas in the above example ($2000 divided by 1.07).
If the Indiana sales tax on gas tax is repealed than Bob would spend $130.84 less due to the repeal of the gas tax assuming that the price of gas were to drop by the full 7% (Which it would not; however, for this example lets assume it the price does drop that much)
I agree with Jeff that my example person (Bob) will then turn around and spend the $130.84 he saved on other items and the State of Indiana will then collect sales tax on a majority of those items. There are many items in Indiana that are exempt from sales tax, for example food items in a grocery store.
If we assume that Bob spends all $130.84 of the money he saved due to the repeal of the gas tax on items on which Indiana collects sales tax then Indiana will collect $9.16 on the extra $130.84 Bob spent due to the repeal of the Indiana sales tax.
So if we repeal the Indiana sales tax on Bob next year using the above assumptions the State of Indiana will bring in $121.68 less from Bob in sales taxes in 2009 if the Indiana sales tax on gas is repealed.
Jeff your math does not work because you are making gas exempt from sales tax; this will significantly lower the amount of sales tax collected in the state.
Mike Sylvester
Let’s throw some other variables in this. Sales tax can impact retail shops near state borders.
Mike,
It’s a bit more complicated than your simple example suggests. If the people who collected the extra $121.68 simply stuffed it under their mattresses then I would agree with your analysis.
But in reality the $121.68 that doesn’t get sent to the state gets recycled through the community and has a multiplicative or cascading effect on economic input.
Every $1 spent in the community (at least in most industries) will generate more than $1 of economic input for other industries. This is classic RIMS Input-Output modeling.
It’s this multiplicative term that drives the revenue neutral argument. The converse of this is seen in the data I supplied. Despite the fact that gasoline sales tax revenue is up, overall sales tax receipts are down 20%.
Mark,
I appreciate the thoughtful comment. I agree our energy prices are likely not going to come down anytime soon.
I believe part of the problem is that everyone has their preferred solution. It’s either more drilling OR alternative investment OR nuclear OR biofuels, etc.
I think we’re going to have to stop looking for the magic single solution and start replacing the OR’s in the above paragraph with AND’s…
Jeff,
I agree it is more complicated than my example; however, repealing the Indiana Sales Tax on gasoline is not revenue neutral.
I agree with you that there is a cascading effect; however, not near enough to account for the repeal of the Indiana sales tax on gasoline.
There are several other factors that would cause your proposal to be even less revenue neutral:
1. People from other states (and countries) pay Indiana sales tax on gas when they drive through Indiana. This is revenue for Indiana and if these people from other states were to save this money they would then spend the money they saved in their own state, not Indiana.
2. The money saved by not paying a gas tax would often be spent on items like food in a grocery store on which there is no sales tax.
Mike Sylvester
Jeff,
The overall sales tax data shows that overall spending in Indiana is not as high as was projected; meaning that due to the economy people and businesses are not spending as much as projected…
Mike Sylvester
“People from other states (and countries) pay Indiana sales tax on gas when they drive through Indiana. This is revenue for Indiana and if these people from other states were to save this money they would then spend the money they saved in their own state, not Indiana.”
Yes, but people from bordering will be more likely to buy gas here instead of their home states if they can get gas cheaper here.