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You didn't even mention that for some reason, his plan includes an additional $100 a year fee for alternative fuel vehicles. I don't understand what the thinking could be there.

Then again, there's not a reasonable rationale for much of anything in this proposal.

I should point out, though, that this is often taken as a given:

If Virginia goes for McDonnell's idea, the gap between Virginia gas prices and DC and Maryland gas prices would widen.
It's not entirely clear that removing the gas tax will actually reduce gas prices by much. My understanding of studies of this relationship is that some, but by no means all, of the gas tax is reflected in prices at the pump. So we should not take it as given that even removing all gas taxes would result in a large decrease in prices.

It's similar to what you see at duty-free shops at the border. At those shops, taxes that make up a huge percentage of the retail price of goods like wine and liquor are removed--and yet the prices are not that much lower than at non-duty-free shops. Why? Because retailers aren't setting prices based on how much goods+taxes cost them, but on what the market will bear. In the case of duty-free shops, demand is pretty elastic but there's only a finite number of firms in the marketplace. These firms just need to set prices a bit lower than non-duty-free shops, and they are able to attract plenty of customers.

In the case of gas, there still may be a limited number of firms selling it in an area, but more importantly, demand is quite inelastic. So it's possible, perhaps even likely, that prices will not have a particularly strong relationship with the level of taxes.

by Gray's in the Fields on Jan 9, 2013 10:47 am • linkreport

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