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Raise the Gas Tax

posted Sep 28, 2015, 9:56 AM by Joel Wood

This commentary was published in the National Post on September 21. 

During the federal election campaign, promises have recently been made about federal funding for infrastructure projects. However, there is a feasible funding option readily available to the Ontario government to help fund their planned investment in transportation infrastructure: Higher gasoline taxes.

A regional gasoline tax for the Greater Toronto-Hamilton Area could reduce traffic congestion, air pollution, and accidents, while raising revenue that could be used to reduce other taxes, fund transit infrastructure, or reduce the provincial debt.

Most economists have long been in favour of taxing products like gasoline for two reasons. First, in the short run consumers respond only slightly to a change in the price of gas relative to how they respond to changes in the prices of other goods or services. This means that a gasoline tax is less intrusive than other taxes. Second, although drivers respond slightly to gasoline taxes, they still respond by buying less gas (e.g., driving less). By incentivizing people to drive less, a gasoline tax reduces the negative effects that drivers impose on others. Driving leads to costly effects on third parties such as traffic congestion, carbon dioxide emissions, smog and accidents.

In a newly published study, Is It Time to Raise the Gas Tax? Optimal Gasoline Taxes for Ontario and Toronto in the journal Canadian Public Policy, I survey estimates of how consumers respond to gasoline taxes, the costs of traffic congestion, the costs of air pollution, and many other parameters. These estimates are then used with an economic model to calculate that a regional gasoline tax in the GTHA should be around 15 cents per litre in excess of the existing provincial and federal gas taxes (a total tax bill of 40.57 cents per litre).

An additional 15 cent tax may seem high to Toronto drivers, but it is on par with the regional gasoline tax levied in Metro Vancouver (17 cents per litre). The existence of a similar tax in Metro Vancouver is suggestive that a regional tax of this value is a real possibility for the GTHA.

It should be noted that there are preferable policies available to address traffic gridlock in Toronto. A comprehensive system of congestion pricing would more directly reduce gridlock. London and Stockholm have had success with this type of policy. The province’s recent willingness to adopt High Occupancy and Toll (HOT) lanes is a step in the right direction. The long-term plan should be to adopt a policy of pricing congestion; however, a regional gasoline tax may be more politically palatable than a full congestion pricing system in the interim.

If the Ontario government views a regional gasoline tax as unworkable, raising the province-wide gas tax is another possibility. The results from my economic model suggest that a 5 cent increase is appropriate in the absence of a regional tax.

The Ontario gasoline tax has not changed since 1992 and the federal gasoline tax has not changed since 1995 and neither is indexed to increase with inflation. Whereas, income tax paid increases as incomes adjust to inflation. Drivers in Ontario have paid gasoline taxes that were much higher in inflation adjusted terms in the past.

My study considers two possibilities of what could be done with the resulting revenue from higher gasoline taxes: Reducing income taxes or funding public transit infrastructure. The choice of what is done with the revenue does not affect the technical results of the study, i.e., the regional gas tax should be around 15 cents. However, using the revenue to fund public transit could benefit lower income groups who may be negatively impacted by the tax. Mitigating possible regressive impacts might build support for the tax. There also may be gains in public support if the earmarking is done in a transparent manner so taxpayers can see that the money is going towards infrastructure projects and not into the general revenues of the government or Metrolinx. The Metro Vancouver gasoline tax is earmarked to funding the operations of Translink, the regional transportation authority.

On the other hand, using the revenue to reduce income taxes encourages people to work more; therefore, reducing the negative impact of the tax by encouraging economic growth.

Whether the revenue is targeted to transit infrastructure or income tax relief, it is time to raise the gasoline tax on Toronto drivers.