Economics professor responds to Alabama gas tax

Photo of Dr. Henry Thompson

Written by Dr. Henry Thompson, Emeritus Professor | Department of Economics | College of Liberal Arts at Auburn University

The first question to ask when a new tax is proposed is how the government is spending its present revenue. The Alabama government collects different taxes to fund spending on a wide array of services and infrastructure.  How much to spend on what is one side of government activity. How to collect the revenue for spending raises the political issue of who pays.

The sales tax is collected on all purchases, the income tax on productive activity, the corporate tax on profit, and the property tax on real estate. The proposed gas tax is an excise tax on the gasoline market with the revenue going to fund roads and bridges.  

The first principle of taxation is to reduce what it taxed. The sales tax reduces overall consumption, the income tax productive activity, the corporate profit tax production, the property tax capital accumulation, and excise taxes consumers and producers of the taxed product.

The increased gas tax will decrease the amount of gas sold hurting consumers and producers of gas. Everyone in Alabama drives and consumes products delivered with gas. The tax will decrease the quantity of gas consumed and raise the price of gas to consuming households and businesses.  The producers of gasoline will receive a lower price. The government inserts itself between the suppliers and the consumers to collect the difference as tax.     

Business in Alabama will also pay the gas tax raising their cost of production.  Production of all goods and services will decrease. Some firms may relocate to lower tax states. Other firms will decide not to locate in Alabama.  

Low income households spend a larger share of their income on gas than higher income households. The gas tax is regressive putting a heavier burden on low income households. The sales tax is also regressive. The property tax is progressive in that higher income households own more property.

The level of the gas tax in Alabama before the increase is about the average across all states. The proposed gas tax would raise Alabama above the average but leave it well below the highly taxed states. Assuming the spending on roads and bridges is justified, the political issue becomes who pays the tax. The gas tax is regressive as households with income below average will pay a higher percentage of their income. Sales, income, and property tax revenue could be spent on the roads and bridges.   

Instead of trying to justify the new regressive gas tax, the government could begin a discussion of the overall tax system. Discussion could also focus on how the government should spend its revenue. The proposed roads and bridges could be built with other tax revenue, or with decreased government spending.       

Last Updated: March 26, 2019