State Tax Snapshot: Should Taxes Be Used to Deter Behaviors?

An oil company moved one of its drilling rigs from Alaska waters despite reports of a gathering storm. During the trip, the rig broke free from its tugboat in stormy seas on Dec. 31 and ran aground on an uninhabited Alaskan island.

What prompted the poorly timed decision to move the rig? Some charge that avoiding a $6 million tax assessment on Jan. 1 from Alaska was a main driver of the decision.  

It comes as no surprise that taxes can influence behavior. Governments have long experimented with the idea of using taxes as a stick to wield against certain types of undesirable conduct.A few years ago, London sought to cut down on traffic congestion by imposing a tax on drivers who wish to enter the city during peak times. Some advocated for a similar tax in New York, but an effort to enact it into law fell short.

Recently, state and local governments have had mixed results in imposing taxes aimed at deterring behaviors that they deem to be bad for the environment or unhealthy. Among the jurisdictions to impose a tax on plastic bags is the District of Columbia, which began levying a 5 cent tax per bag in 2010.

Other types of taxes meant to combat obesity have met with greater resistance. In November, voters in two mid-sized California cities rejected ballot initiatives to impose taxes on soda.

But not all tax plans intend to implement the carrot and stick concept. Recently, Virginia's Gov. Bob McDonnell proposed a transportation funding plan in which the state's gas tax would be replaced by a small increase to the state's general sales tax. (Gas would remain exempt from sales tax under the Governor's proposal). Additional funds would be raised by imposing an annual fee on owners of hybrid vehicles.  

Critics of the plan point to a disconnect between the tax and desired transportation policy outcomes. "Travelers and others passing through Virginia would not have to pay the state to use its infrastructure, while elderly residents and others who don't drive would," Ron Utt, a transportation writer formerly with The Heritage Foundation told the Virginian-Pilot.

 The Virginia Pilot story also quoted Robert Poole, director of transportation policy for the Reason Foundation, who noted that the "All the talk" of the last four or five years in transportation policy circles has been toward more user-based revenue streams, such as charging drivers based on the amount of miles they drive. "But I've never heard anybody replacing it with a sales tax," he said.

By Steven Roll

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