Analysis of the Diesel Tax in Vermont And Current Alternative Fuel Vehicle ProgramsPeter Freeman10/12/2004PA 395 - FlomenhoftAt a rate of $0.26 per gallon for commercial trucks and $0.16 per gallon for cars and trucks lighter than 10,000 pounds, the diesel tax brought in $18 million (about 13%) to Vermont’s Transportation Fund during the fiscal year 2004. Out of those two taxes, $0.01 per gallon in revenue is dedicated to clean up fees, and the rest is put into the transportation fund. This tax at the pump is applied to clear diesel that is used in both carsthat are on the road and other vehicles, such as tractors. There is a form of diesel that is dyed, however, which is supposedly more polluting. It is not subject to the tax at the pump, but rather only Vermont sales tax, unless it is being used in a non-propulsion device. Dyed diesel is prohibited in cars that are on public roads, but permitted to be usedin a number of non-taxable ways and vehicles. These uses of both types of diesel that are exempt from taxes are, “official purposes by state, municipal, fire districts, school districts and other government owned vehicles. Uses for agricultural purposes not conducted on the highways of the state. Used by any vehicle registered as a farm truck. Used by any vehicle off the highways of the state. Used by motorbuses registered in Vermont. Used by IFTA vehicles allowed as non-taxable for non-propulsion” (5) or “A stationary engine, a refrigeration unit with a separate fuel tank, a furnace or other device to heat a building or structure, or a storage tank” (6). These classifications are mostly meant to apply to commercial truckers, who can apply for a refund of the full tax of $0.26per gallon bought of clear diesel. The sales tax remains on both diesel fuels, even after the possible refund.The diesel tax then basically gives a write off to those businesses that use clear diesel rather than dyed diesel in their commercial vehicles. The question that arises iswhether this incentive is a large or small step in the right direction because there are cleaner alternatives to clear diesel. The refund is clearly designed to have what Milne calls a behavioral effect so as to encourage the shift from dirtier to cleaner diesel. One could assume that the tax break is large enough to induce the shift, but that the original tax is not large enough to discourage diesel use all together in non-commercial vehicles. There is a small element of the polluter pays principle in the $0.01 per gallon for clean up costs. This small amount can only be for the purpose of internalization, however,and likely has no effect on behavior. Furthermore, it does not appear as though one cent accounts for a full internalization of diesel use, including pollution prevention and controlplus the damage costs of what has not been prevented. The small internalization tax should be greatly increased if Vermont is, in pursuance of a Pigouvian equilibrium, concerned with bringing the private cost of diesel fuel up to the social cost of its pollution. Perhaps once the full internalization costs are calculated, they can be subtractedfrom the clean diesel refund that commercial vehicle owners get. This would still encourage the shift away from dyed diesel by the same amount, but would also add an incentive to further shift away from diesel use.A tax policy that increases the cost of diesel fuel to a prohibitive amount would bedevastating to the huge agricultural sector of Vermont’s economy. A gradual shift out of diesel use on and off the road is preferred. Therefore, a double dividend approach large enough to eliminate a relevant tax may be too much of a burden, especially considering the relatively small amount of revenue the tax brings in annually. Taxes on gases usually have largely distorting effects on the economy, but it might be time to consider increasingthem now that better alternative technology and materials are easier to transition into use.A productive approach might be to add another first dividend to the goal of internalization. This second cause could be the funding of various alternative fuel vehicle promotion programs that are currently under funded in Vermont and would have the potential to have a large environmental impact on behavior if proliferated.The automotive market is one of the most stubborn in our economy. Americans love their cars and want them to be big and fast. Naturally, automobile producers respondto this demand, but waste a huge amount of technological resources in the process. The improvements to fuel efficiency have been used to make heavier cars more affordable. This trend, which brought about the popularity of the SUV, has created a huge market for large vehicles, even though their fuel efficiency is poor. Feebate programs such as the gas-guzzler tax have had limited affects on the demand for such cars, partly because the bigger cars are often more expensive and their wealthy consumers are less phased by an increase in price. The elasticity of demand on low emission vehicles is even smaller, however, thus rebates are not very effective unless they are huge. Large gas taxes that would sufficiently increase the price of driving would be difficult to pass as legislation because of the large affect it has on the macro economy. Therefore, since the demand for alternative fuel vehicles (AFVs) is difficult to create in the private market, the most effective method of getting these cars on the road is on the supply side through direct regulation of municipal fleets and manufacturers. After all, people have to know that AFVs are out there (and if they could be cool and fast, that would be even better) before they will consider buying them themselves.The supply side includes economic incentives as well as direct regulation to increase the number of AFVs, the convenience of owning an AFV, as well astechnological innovation to improve AFVs. The current legal and economic climate in Vermont is conducive to such improvements, but could be better. Although Howard Deanwas very concerned about cleaning Vermont’s air, Governor Jim Douglas recently galvanized governmental action when he issued Executive Order (14-03) in September 2003:“I, James H. Douglas, by virtue of the power vested in me as Governor of the State of Vermont, do hereby direct state government agencies and departments to reduce greenhouse gas emissions from state government buildings and operations. Vermont's goal is to
View Full Document
Unlocking...