Gas Tax vs. Sales Tax: Which Wins?

In his statement today concerning public transit the Governor Blagojevich outlined his preferred plan to increase the level of transit funding:

The plan that I prefer would redirect – not increase – revenue from the existing sales tax on gas in Cook and the collar counties for the RTA. That’s money that is already collected from drivers who contribute to congested roads and air pollution in our region. It makes sense to dedicate that revenue to mass transit, and it also helps reduce congestion and air pollution.

The remaining hole in the state budget can then be filled with revenue from an expansion of gaming in Illinois – an expansion that every one of the legislative leaders has already agreed needs to get done to fund a statewide infrastructure plan.

There are some things to like about this approach, which appears to have the support of the Republican leaders and perhaps Senator Jones. The Governor recognizes that linking the gas tax (or more precisely the sales tax on gas) to transit makes good public policy. Drivers who create congestion, who benefit from the congestion relief benefits of public transit, and who contribute a large measure of air pollution, including greenhouse gases, properly are called upon to subsidize transit service. Those who drive the most tend to pay the most, which creates a bit of an economic incentive against sprawl.

While the Governor appears unwilling to increase the gas tax (or embrace congestion pricing for that matter) to reduce the congestion and pollution resulting from excessive private auto use relative to road capacity, linking transit funding to the gas tax is something that his successor can build on to start pricing auto travel in a way that promotes the most efficient use of the Chicago region's highway and transit systems.

The Governor's gas tax plan takes existing gas tax revenue from the six-county Northeastern Illinois region and applies ("diverts" in some eyes no doubt) that revenue to the region's public transit system. Filling the resulting hole in the State budget becomes someone else's problem while the RTA, the Chicago Transit Authority, Metra and Pace spend their new money. This is not a bad scenario if you are a transit supporter.

The Governor recommends that revenue from expanded gambling can fill the hole in the State budget created by the application of the gas tax monies to transit. There is something to like here as well, especially if you live in northeastern Illinois. A fair amount of that revenue will be generated from people from outside northeastern Illinois or even Illinois itself who gamble when visiting Chicago or other Illinois gambling facilities. The burden of transit funding thus is spread outside of the six-county region, another nice benefit for that region. The region gets the gas tax revenue for its public transit system but is not completely on the hook to fill the resulting hole in the State budget.

Using gambling revenue to replace the gas tax monies used for transit could put the City of Chicago is a difficult spot, however. On the one hand, the City presumably wants to find a source of funding for CTA and Metra service that serves the City. On the other hand, if that source of money requires the City to give up proceeds from a Chicago casino that would otherwise go to the City, then transit doomsday might not look so bad to the City.

In contrast, the sales tax built into SB 572 is not as directly tied to transit or driving. Charging a bit higher sales tax on a big screen TV, for example, is not likely to prompt anyone to change their driving habits. The sales tax has proved insufficient to keep up with transit agency costs, so it is a matter of time--likely only a few years--before the proposed sales tax increase in SB 572 proves inadequate for the transit agencies to maintain their current service levels. The increased reliance on the sales tax does not help the RTA diversify its funding base, even though such diversification is key to the long-term financial health of the public transit system.

When it comes to the predictability of revenue the sales tax wins. One virtue of the sales tax is that is does not vary that much from year to year. In contrast, a sales tax on gasoline sales is likely to bounce around with the changes gas prices.

On balance, however, taxing driving to pay for transit is at least as good an alternative as the sales tax to provide funding for transit. In many respects, a gas tax is superior.

Surely it is possible to amend SB 572 to swap out the sales tax increase in favor of the redirection of the sales tax revenue on gas, leaving in the CTA union concessions and the much ballyhooed RTA reforms. Hopefully, someone is work on that right now.