MY TURN: How to raise the state gas tax

By Holley Ulbrich  |  Gov. Nikki Haley got it two-thirds right this time.

We need to raise the gas tax (her proposed 10 cents is fine), and we need to reform how we set priorities for maintaining and improving our roads and bridges.  We may even need to offer a tax break in some other way to offset the burden on individuals who are paying more gasoline tax, although it doesn’t seem to be too pressing at the moment with historically low gas prices.  What we don’t need to do is use it as a pretext for a tax break that is slanted toward higher-income families.

South Carolina is the third lowest among the 50 states in taxes on gasoline, only above New Jersey, which has refineries, and Alaska, which produces oil.  Our 16.75 cents per gallon is just below half the national average of 30.73 cents.  North Carolina’s is 36.25 cents, and Georgia’s is 32.62 cents. Even if we raised it to 26.75 cents, as the governor proposes, we would still rank 26th.

The gasoline tax is a benefit tax, somewhere between a general all-purpose tax (like income or sales) and a user fee, where the tax is paid because the payer is creating a cost—in this case, by causing wear and tear on the roads.  In South Carolina, a significant amount of the gasoline tax is paid by tourists, business travelers and truckers.  Coming from other states, tourists and business travelers would probably not pay much attention to an increase of 10 cents a gallon—not nearly as much as they would be affected by the neglect of our highways and bridges.  As for truckers, they pay higher taxes in other states, but the revenue from the gasoline tax is apportioned among the states where they drive based on miles driven in that state and the state’s gasoline tax rate.  So we are losing a potential larger share of the total pot of gasoline taxes shared among the states by that formula.

I also agree with the governor that the present system for selecting road commissioners is not equitable.  But the legislator doesn’t like to mess with its power of appointments, so it’s better to have more roads fixed than fewer, even if the distribution is far from perfect.

But the important question is the tax relief.  That’s where we diverge. We have urgent state needs beyond roads—funding public education, keeping the cost of public higher education affordable, monitoring our water so we don’t have any Flint [Mich.] episodes, staffing the DSS—the list goes on.  So a tax increase could certainly justify a tax cut as a quid pro quo.  

There’s a fine tax and budget principle developed by Republicans during the Reagan years that fits the situation well.  It’s called revenue neutrality, and it means focusing on getting the tax system right rather than raising more revenue—or less.  Raise the same amount in a different way. So any cut in the income tax should be roughly equal to the amount of additional gasoline tax revenue coming from South Carolina residents—not almost three times as much income tax relief as gasoline tax increase that the governor has proposed.

One equitable way to distribute relief would be to give in-state drivers as an income tax credit based on miles driven. Alternatively, we could give tax relief that is spread broadly among all taxpayers, since nearly all of them use the roads directly or indirectly.  I would favor the former, because it only gives relief to our residents, not to everyone who drives on our roads.  

But if we have changes to the income tax tables, a far more equitable solution would be to broaden the brackets rather than cut the top rates.  Right now, a single person hits the 7 percent top rate at a taxable income of only $14,400.  That’s the same top tax rate paid by someone with $50,000 or $200,000 or $500,000 in taxable income, even though their gasoline consumption is not four or seven or 18 times as high.

Gov. Haley learned her economics at Clemson University, where those of us who taught economics explained the reasonable argument that decisions by households and business firms are based on marginal rates, not average rates (the rate on the next or last dollar of income or profit).  So why do we want to offer tax disincentives to so many of our working citizens by having them hit the wall (the top bracket rate) when they aren’t too far above the poverty line?  If our labor force is our most critical economic development issue, and many sources seem to think so, then we should encourage workers to invest in themselves, acquire better skills and go to work at a better job and higher pay.  

Broadening the brackets rather than cutting the top rate will benefit everyone, because even our wealthiest citizens would be paying lower rates on part of their income.  Our top rate would be a lesser problem if taxpayers didn’t get there so fast or on so little income.

So two cheers for Nikki Haley for tackling two parts of the roads and gasoline tax issue well. But let’s give some careful thought to how much tax relief is called for and to whom it should go.

Holley Hewitt Ulbrich is Alumni Distinguished Professor Emerita of Economics at Clemson University.