Wednesday, December 31, 2008

A Gas Tax Salve for Housing Prices

I have previously written my skepticisms on raising the gas tax. Economist Greg Mankiw views it as a Pigovian Tax to help reach environmental social goals. I think that the environmental advantages are overblown as we saw only minor reductions in gasoline consumption when prices went up to $4.00.

However, given my skepticism, there is another social goal that can be achieved without violating my libertarian principals. If states were to increase gas taxes and in exchange lower property taxes this should help increase demand for homes.

I'm not sure what the total property tax revenue for California is, and their rate averages a pretty low 4.77/$1000 of valuation, but if you estimate that the average home is worth $400,000 in the state, then eliminating property taxes would save the average home owner a little over $1,900/year, or $158/month. Assuming 3.5 people per house, this means about 10 million homes, and thus $19 Billion in lost revenue.

On the gas tax revenue side we can again use some approximations. Americans use 390 million gallons of gasoline per day. If we assume California uses 1/8th, since they have about 1/8th of the population this equals 48.75 million gallons per day. Multiply by 365 days and you get around 17.8 billion gallons per year. If California were to charge a new tax of a dollar per gallon this would lead to around $17 Billion in revenue (assuming a slight decrease in driving).

This back of the envelope estimation might not be perfectly accurate, but it looks like the gasoline tax could help eliminate property taxes in the state. Getting rid of property taxes would make homes cheaper, but not lower their face value (sales price). It should help offset some downward pressure on home prices without the moral hazard problems of bailing them out. It also seems politically feasible given the "green" inclinations of the party in power.

5 comments:

Doug Keegan said...

The left would never go for this, claiming the gas tax is regressive.

Brian Shelley said...
This comment has been removed by the author.
Brian Shelley said...

Actually, I think they might if they knew all the facts.

First, property taxes are also regressive. Since property taxes are paid on rental properties the taxes are built into rent. The poorest overwhelmingly rent, and don't own. Rental properties don't get a discount on their federal income taxes for property taxes or mortgage payments. Nor are they allowed a homestead exemption. The poor also pay a much higher percentage of their income on rent then wealthy people spend on their primary residence.

Secondly, there is tremendous desire among the left to discourage driving. A carbon tax, which they support, would have some of the same effects.

Unfortunately, I have done some more research and is seems that property taxes are more of a local affair in California. The state mostly relies on income tax and sales tax. It would work better in Texas, but Texas isn't facing a housing crisis like that of California.

Doug Keegan said...

I'd also posit that our high property taxes in Texas were a contributing factor in minimizing the effects of the housing bubble here.

Re: regressive taxation. Then (playing devil's advocate) the argument becomes that a massive increase in the cost of gas is *more regressive* than the already regressive property tax system. Moreover, that gas tax is passed on to consumers of basic goods and services.

Brian Shelley said...

Re: Property Taxes and Texas housing bubble

Actually, I had an article published on the topic here

Also, search for Housing Bubble on my blog and you can find a number of more in depth analysis.

In short, California is heavily zoned and regulated. In Texas, a housing bubble is hard to get started because it is so easy to build new housing (which keeps the price down). There were other factors that made the bubble bigger, but this was the proximate cause.