A Soft Landing: Impact Taxes

This is the sixth in the series, A Soft Landing, which explores how we might achieve a more just, equitable society without violent revolution.

Taxes are a most effective form of behavior modification. Every kind of tax, no matter how seemingly universal, affects our actions. When we tax a product, a service, a piece of land, we shrink its net value by jacking up its opportunity costs, thus driving people to either pay more, find alternatives, or do without.

A simple example. For five bucks and change in tolls, I can drive from Cambridge to Albany in three hours on the Mass Pike. Or, I can drive Route 2 for free. Route 2 is more scenic, but the journey takes over four hours. Which route I follow depends on how much time I have. If my time is worth more than five dollars an hour, I take the Pike, correct? Actually, it’s not so simple. A deeper level analysis changes the calculation. If the weather is bad, the Mass Pike is safer. In addition, Route 2 requires more gas and vehicle wear, so that route actually costs more than the Pike, despite the toll. However, like most humans, I am more sensitive to direct pay costs (a toll) than deferred costs (maintenance), so I don’t properly factor the real cost of my trip. As this simple tax example grows complex, we see that although taxes modify our behavior, the causation is neither linear nor direct.

A more extreme example. The State of Colorado extracts a 39% cumulative tax on recreational marijuana. That’s a lot. If I live in Colorado, I have three options: buy pot legally and pay the tax, purchase it illegally, or forgo getting high. For many, the third choice is not an option, and so Colorado collects an impressive amount of tax on marijuana because the other alternative, the black market, comes with significant downsides.

Similarly, tax credits and deductions modify behavior by reducing opportunity costs, thereby increasing economic activity accordingly. When Massachusetts offered credits for installing residential solar panels, we became a national leader in residential solar, despite our cold and grey weather. When the credits expired, the solar market shrank, as reduced utility…