A 25% Massachusetts gas tax hike would mean loss of 1,000 private sector jobs

With gas prices falling in Massachusetts, state leaders are thinking about increasing the gas tax. Just how much the Governor and legislature are willing to raise the tax is unclear.

But assume that the legislature approves a new 29 cents per gallon tax (up from 23.5 cents) representing a 25 percent increase (not unlike the last hike to the state sales tax). What would that mean for the state's economy?

Using its State Tax Analysis Modeling Program, the Beacon Hill Institute estimated that a 25 percent increase would not help the Commonwealth's economy as it tries to add jobs.

Compared to a baseline of no gas tax increase, the state would have 1,170 less private sector jobs, while adding 600 public jobs in the first year. Riding the brakes would have consequences. At the margin, less employment means consumers will have less money to spend, so while gas tax revenues increase by $152 million, the state would collect $5 million less in sales tax, not to mention that companies will be selling less. Similarly, with 570 total less full time equivalent jobs, state personal income tax collections would decrease by $8 million.

In total , instead of collecting $152 million more in gas taxes, the state would see a total revenue increase of only $116 million, due to dynamic effects. At the cost of lower employment, income, disposable income and investment, raising the state's gas tax is a bad policy at a bad time.

Has the optimal gas tax been identified?

Mass High Tech's Kyle Alspach

In 2007, a study in the Journal of Economic Literature found that the ideal average gas tax for the U.S. would be $2.10 a gallonhttp://www.blogger.com/img/blank.gif. At the time, the average tax was 40 cents a gallon — 18.4 cents for federal and 22 cents for state (it’s currently 23.5 cents in Massachusetts).

The $2.10 figure takes into account greenhouse gas emissions, local pollution and oil dependency, along with the costs of congestion and accidents.

To make the tax palatable, economists say the government could cut taxes in other areas — say, the income tax for consumers or corporate taxes for businesses.

The tax trade-off seems like a reasonable idea but revenue-hungry politicians would never take up the offer.

In the rush to move toward a Pigouvian tax model, supporters of higher taxes tend to forget that such excise taxes are regressive. More than they did in the past, low-income workers rely more heavily on jobs in the suburbs and most use cars to get there.