I guess Ben Franklin (or Chris Bullock, I suppose) was right about that death and taxes thing, since, if for no other reason, taxes are necessary in order to overcome the free-rider problem and collect the funds that provide the optimal quantity of public goods in a society.
Of fundamental importance, then, is how this tax revenue gets collected. Economists have a few different principles to think about on this front- one is the “ability to pay” principle, which, as its name implies, suggests that public goods should be funded by those most able to pay for them. Another principle is the “benefits” principle, which suggests that public goods should be paid for by those who benefit from the public goods the most. Unfortunately, economists don’t have a whole lot to say regarding the validity of these principles- the ability-to-pay principle has some grounding in a utilitarian framework at least, but the benefits principle is mostly something that seems intuitively reasonable.
Luckily, there is a third principle that is easier for economists to get behind- why not tax the production or consumption of things that impose costs on society at large? (In economic terms, why not tax those things that create negative externalities?) Left on their own, markets that create negative externalities produce more than is optimal for society because producers and consumers don’t fully take into account the effects of their choices on the well-being of society overall. Intelligently designed taxes on these markets (often referred to as Pigouvian taxes after economist Arthur Pigou) can get producers and consumers to internalize the costs to society into their decision-making processes so that the quantity of the good transacted is closer to what is best for society. And, hey, such taxes raise some money to fund the aforementioned public goods as well. (The flip side of this principle, of course, is to subsidize those goods that create benefits for society at large, i.e. that create positive externalities).
This logic is often invoked to justify taxes on items such as gasoline- consuming the gasoline is bad for the environment, but the driver of the car doesn’t bear all of that cost and thus doesn’t have the proper incentives to think about the cost of pollution when deciding how much to drive. The gasoline tax mitigates the problem to some degree and also gets the government some cash. But what happens when the gasoline tax works too well and people start buying hybrid vehicles?
If you’re a Virginia lawmaker, you likely think that the solution is to place a tax on hybrid cars. The reasoning behind this seems to be that hybrid car owners are escaping the gas tax to some degree and need to make up the payment somewhere else. The argument against it is one about Pigouvian taxes and subsidies:
“People who are doing their part to reduce oil consumption reward all of us with cleaner air and less climate pollution — but now Virginia will turn around and punish hybrid car owners,” Kemler said. “Just like many companies offer health incentives for quitting smoking, Virginia should reward, not punish, people who drive the cleanest, most fuel-efficient cars.”
In this particular case, the tax revenue would be used to maintain roads, so taxing hybrid owners to make up for them not paying the gas tax is in line with the benefits principle of taxation, but it fails a basic reasonableness criterion of “tax things you want less of and subsidize things you want more of.” (Income taxes also fail this test, as do general consumption taxes, but that is a conversation for another time.) I was hoping that this would be an isolated “oops” sort of incident, but apparently North Carolina is looking to follow Virginia’s lead:
Dear North Carolina: You’re doing it wrong. Economically speaking, both Virginia and North Carolina are saying that they want at least some of their residents to switch back from purchasing hybrid cars to purchasing regular gas guzzlers. The most frustrating part is that this makes perfect sense from a self-interest perspective- the state legislature certainly feels a lot more pain from having an increasing budget shortfall than it does from producing some more pollution that everyone else who doesn’t write stupid policy has to deal with. In essence, the externality problem exists not only at the level of individual production and consumption but also at the state regulatory level. (In fact, China seems to have a mentality that closely parallels this.)
Here’s the problem, though- it’s one thing for a for-profit business or consumer to be self-interested and not do what is best for society unless it has the proper incentives to do so, but a main principle of government is that it is supposed to have a fiduciary duty to society and be immune to what would typically be thought of as profit pressures. In this way, both Virginia and North Carolina are failing- can’t you both just find something that imposes costs on society to tax instead? (And no, you can’t just choose something that you personally don’t like.) If y’all can use lotteries to fund education, it really need not be the case that you fund your roads with something having to do with cars. You seem to have some wiggle room with your cigarette taxes, for example, but I think even I’m realistic enough to know how that conversation would go for you two.