On January 30th Maryland Governor O’Malley proposed higher taxes on incomes, water use, internet sales and broadband use, electricity, and motor fuels to fund a 3% spending increase and to cover a projected $1 billion budget deficit. One of these taxes, which would help fund his transportation programs, would be a new 6% sales tax on gasoline, diesel, and other motor fuels. The tax would be added to the existing State excise tax of $0.235/gallon of gasoline ($0.2425/gallon of diesel). If the Governor’s 6% sales tax is enacted, and when fully phased in after 3 years, Maryland would have some of the highest fuel taxes in the country. Including the $0.184/gallon federal excise tax, gasoline sold in Maryland would be taxed at about $0.63/gallon, assuming gasoline prices of $3.50/gallon), and, as a consequence, Marylanders would face some of the highest fuel prices in the United States (the price of gasoline would exceed $4/gallon). Diesel fuel, which is taxed more heavily at both the State and federal levels and which averages $4/gallon nationwide, would have experience even sharper price increases.
The Governor’s gasoline tax proposal would not only result in a second tier of taxes — a double taxation of motor fuels at the state level (the 6% “ad-valorem” tax and the $0.235/gallon “unit” tax). It would result in the compounding of Maryland fuels taxes — a sales tax being imposed on its own preexisting $0.235/gallon excise tax. Moreover, because of the way the federal government taxes motor fuels, the Governor’s proposal would also result in a “piggy-backing” of the federal gasoline tax — a tax on top of preexisting $0.184/gallon federal excise tax. The piggy-backing of the 6% sales tax on the existing federal gas tax means that, should the Congress raise the gas tax to finance its surface transportation bills, as it is likely to do in the future, the Maryland gas tax burden per gallon would also rise, even without any action on the part the Maryland legislature.
To understand these compounding effects it is necessary to describe how gasoline taxes are imposed and collected at the federal and state levels. Generally, the federal gas tax is imposed on refiners as the gasoline “breaks bulk,” which essentially means when it is purchased by wholesalers and loaded onto trucks for distribution to retailers. To illustrate, say the average cost of refining gasoline, including a profit markup, results in a refinery selling price of $3.266/gallon. At this point, the refiner adds the $0.184/gallon federal excise tax and a wholesale-distributor that buys gasoline would pay the refiner $3.45/gallon (the “rack” price). Now consider Maryland’s fuel taxes under current and proposed law. Under current law, the wholesaler adds the State excise tax ($0.235/gallon) and a mark-up (say, $0.05/gallon to cover costs and a profit) to its purchase price and sells the gasoline to the retailer for $3.735/gallon. Under the Governor’s proposal, the wholesaler would also have to assess a 6% sales tax ($0.2241) on the already taxed product. Thus, retailers would pay $3.959/gallon to the wholesale (the $3.45 refinery price + the $0.235 Maryland per-gallon tax + the $0.2241 from the 6% sales tax + a $0.05 mark-up) and add in their own cost/profit markup to set the retail price to consumers. Assuming, again, that a cost/profit mark up of $0.5/gallon, the final selling price of gasoline to Maryland consumers would be $4.01/gallon. Note that the 6% sales tax would be imposed on the wholesaler’s $3.735/gallon selling price ($3.45 + $0.235 + $0.5), which includes both the $0.184/gallon federal tax ($3.45 = $3.266 + $0.184) and the current $0.235/gallon State tax. This would result in a total compounded gasoline tax of 2.51₵/gallon out of a total sales tax of $0.2241/gallon (6% times $0.184= $0.011/gallon, from the taxation of the federal tax, plus 6% times $0.235= $0.0141/gallon, from the taxation of the State tax).
As this example clearly shows, because all excise taxes on passed through onto the price of gasoline (a standard economic assumption with regard to excise and sales taxes) — they are embedded into the market price of gasoline — any ad-valorem tax will inevitably result in the taxation of each of the individual components of the gasoline price. How much will the compounded taxes cost the typical Maryland motorist? Based on recent gasoline and diesel consumption and prices, the total $600 million sales tax burden on motor fuels amounts to about $190/year for the average motorist), not a large sum, but also not insignificant at a time when fuel prices are already increasing due to higher crude prices. Of this $190 per-capita tax burden, the effect of the compound tax alone is estimated at about $21/year, still a relatively small sum. In the aggregate, however, nearly $80 million (13%) of the $600 million in total revenues estimated to be collected from the proposed 6% sales tax (which would be higher as fuel prices increase) would result from compounding the two taxes. Regardless of its magnitude, however, as a matter of tax principle government should not be piggy-backing its taxes in an effort to finance its programs no matter how worthwhile those programs might be.
These are good points. Regardless of whether or not there should be additional MD taxes tagged on, it makes sense that MD should tax the refinery price.
ReplyDeleteThis piggy back policy is not something most consumers will realize. Thanks for bringing this up.
It is also a concern of mine whether collected tax revenue will remain in the transportation fund or eventually be pulled into the general fund. If we are taxed, I want to see advances in infrastructure. I doubt it.
Professor, are there any guarantees on howt the gas taxes will be allocated in the budget?
ReplyDeletePete Nice