A Smart Gas Tax

The recent announcements by McCain and Clinton of their support for a temporary repeal of the Federal gas tax make me sick. More on why later, but first, I want to put forth my idea. I think both Republicans and Democrats would like it — as it’s based on market principles and achieves a reduction in costs to the average household, while simultaneously helping the environment and reducing our dependency on foreign oil. But of course, it’s courageous, and we don’t have many politicians of that type anymore.

What we need is a large, revenue-neutral, gas tax increase. Now, before people go nuts, let’s explore what this means.

Revenue-neutral means that it doesn’t result in a net increase of monies going to the government. The increase in the gas tax rate is offset by a decrease in the income tax, tied to the cost of direct and indirect taxable gasoline each family or business consumes. So on day 1, if you cost of filling up at the tank goes up by $10 in a week, if you are an average family, your total paychecks also go up by $10. Your cost for receiving a package might go up by $1, and your paycheck goes up by the same amount. So you’re no worse off than before — if you’re average.

Let’s look at the pros and cons of this sort of plan:

  • The economic incentive to be efficient consumers of gas is magnified. This will eventually lead to Americans having more money in their pockets, increasing market incentives for fuel efficiency, and a decreasing (or increasing slower) price of oil as demand slows.
  • Economic incentives to use mass transit, live close to urban centers, or drive fuel-efficient vehicles are magnified. Likewise, the economic incentives to invest in mass transit and efficient automobiles are also magnified.
  • As more efficient technologies come on the market, and Americans decide that they’d like to pad their bank accounts by hundreds or thousands of dollars a year, more sustainable and environmentally-friendly development patterns will emerge. Also, the price of oil will be kept low. Of course, people that choose not to change will, on average, be no worse off than before.
  • Alternative choices to the automobile will have a greater incentive to develop. Think the return of a fast, speedy national passenger and freight network, greater mass transit options, etc.
  • The marketplace will drive Detroit to love making fuel-efficient vehicles, because they will be the new profit centers.
  • This sort of thing is known to work well in other countries around the world.

If we think more long-term, we see even more positive effects:

  • The return to local agriculture and manufacturing. Due to lower transportation costs, local farmers and manufacturers will be able to undercut Walmart’s prices due to the larger relative costs of Walmart’s much-vaunted national distribution network. Unless, that is, Walmart starts buying local — which is a good thing too. This is a good thing for American jobs.
  • Keeping all that oil money in the domestic economy is a good thing for American jobs, too.
  • Our businesses will have a jump start on being competitive in the increasingly carbon-regulated global marketplace.

As for the cons:

  • Eventually this will lead to a net reduction in Federal revenues as efficiencies develop in the marketplace and people save money on gas. Corresponding budget cuts will be required. (A good thing, I figure)
  • Implementing this all at once would be a shock to some people living inefficiently now — those that are far above average. It would have to be implemented gradually to avoid being a shock to the economy.

Now, for the McCain/Clinton plan: it’s a farce. Reducing the gas taxes means more efficient gas, which means more consumption of gas, which in turn leads to — yes — higher gas prices. Its real effect will be minimal, and is a terrible long-term policy. It charges tens of billions of dollars to the national credit card (which we, and our children, will have to repay) while achieving almost no benefit now. It’s a gimmick through and through, and something that says loud and clear that neither candidate is on track for the “Straight Talk Express”.

Update 4/29/2008: One potential solution for the problem of declining revenues over time is to periodically re-index the averages to mirror current usage. Assuming this does really lead to the expected drop in consumption, there is no sense in 2020 of paying people for how much gas they would have used in 2008.

11 thoughts on “A Smart Gas Tax

  1. In response to the main idea of your post, your proposal doesn’t make taxes any higher, so it seems acceptable. However, I don’t particularly trust the government to correctly implement a proposal to raise one tax and lower another, lest they conveniently forget the latter. (The same argument applies to the proposals to “replace” the income tax with a sales tax.)

    I take great issue with one point in your last paragraph, however: “It charges tens of billions of dollars to the national credit card”. Reducing taxes does not spend money, or cost the government money. Reducing taxes *gives the government less money*. Government spending charges tens of billions of dollars to the national credit card. To phrase it the way you did implies that the government had the right to the money in the first place, and graciously let us keep some of it.

    We the people have the right to our own money, and we let an irresponsible government continue to take it from us, because we apparently lack the ability or the gumption to change that.

  2. Where would the increase in pay come from? The same tax I’m paying?
    Then your logic is flawed, since a decrease in my gas consumption would be rewarded with a decrease in my paycheck, which would make the whole excercise pointless.
    Also, the gas consumption is very inelastic, which is why the gas can be taxed so heavily (although US taxes on gas are not that high), so increase in cost doesn’t make you consume less (think: you use gas because you need to, not because you want to). You would have to drastically increase gas cost to actually gain anything.

    1. I do support drastically increasing gas costs, to the level that is found in the UK, over time. I recognize that this large change is needed to gain meaningful change in our consumption.

      But I think your point is flawed. People adjust their habits based on gas prices. Already we are hearing of people selling homes in suburbs 2 hours out from the city and moving downtown because it’s cheaper to live close to work now. We have movements to add and improve mass transit nationwide, in both “red” and “blue” states — even here in Kansas, and most notably in Atlanta. The higher prices are already having an effect.

      I did point out that a decrease in gas consumption would need to be met with offsetting decreases in the federal budget (or other sources of revenue, of course). I think that can be accomplished.

      To the anonymous poster, yes I agree that it may be tricky to get the averages right, especially for businesses. But just because it’s tricky doesn’t mean it can’t be done. Remember, we are in charge of the government, and if we care enough to make sure it gets done right, it will.

  3. So, I’m assuming that the income tax reduction is even across the board based on average consumption. The country is very diverse, you’d be unfairly penalizing individuals and industries.

    Lets say you live in San Francisco. Given the density of the city, mass transit is easy.

    I live in Phoenix, mass transit means turning a 20 minute commute into a 90 minute commute. Talk about a drop off in productivity.

    Tinkering with the economy and adding false incentives is bad, and will generally end badly.

    You are looking at the problem wrong. The problem isn’t with gasoline, its with energy. Its time to expand our energy base. Build more nuke plants, build more oil refineries, expand coal resources, drill more oil and natural gas. The international demand for oil will not change by actions undertaken here.

    1. Well, this is really the point. Not so much a penalty, but an incentive. Rising oil prices and increasing regulation on greenhouse gas emissions are going to do this to gas prices eventually anyhow. Why not be ahead of the curve, and re-engineer our economy and cities now, rather than when circumstances force us to later? Why not be competitive globally up front?

      As for mass transit — I know perfectly well that some cities have great mass transit systems and some cities don’t. This would be a great shot in the arm for the cities without good mass transit to build it. There is no reason that you should have to spend significantly more time in your commute with mass transit than without it. Plus, imagine riding on a train with AC outlets at every seat. Not everybody uses laptops for their job, but those that do could be productive while in transit even.

      There are many places that have an incredibly nicely integrated transit system. Portland, OR and Chicago, IL are two that I’ve personally visited. Both cities integrate automobile, light rail, long-distance rail, plane, and bus service. Rail serves major arteries, and parking lots and connecting buses serve the “last mile” of getting people to the rail system. I enjoy visiting those cities because I never have to rent a car. It’s easier to get around, and cheaper and faster, too.

      This point is driven home particularly well in Chicago, where some rail services run right down the middle of the freeways. You can watch the congested and stalled traffic on the freeways sit there while you whiz by on the train.

      Outside of the densely-populated northeast corridor (NEC), where long-distance train service is common and frequent, California and Illinois are two states that are a great model of what can be done with rail, even in rural areas.

      So to summarize, I think that a policy like this would provide a much-needed kickstart to spur local governments to invest in mass transit good enough that people like you would choose it.

      If you look back to the 1920s or before, mass transit was sustainable all across the country, in rural and urban areas. The economic crash and rising popularity of automobiles had a negative effect in many areas, but with a much larger population in this country now, it could certainly be sustainable again.

      Just look at some of the unlikely places it’s popping up: Dallas, Ft. Worth, Atlanta, etc.

  4. Nice to see at least someone saying this in the famously-profligate USA.

    Here in the UK, we have similar problems of being “hooked” on cheap energy – a junkie society. And similar arguments, about fixing it being unfair on rural folks, etc. Speaking from one of the most rural parts of England[1], nothing would please me more than the kind of change you ask for.

    The biggest beneficiaries would be the rural poor: those who are heavily disadvantaged and marginalised by living in a society that *assumes* you have a car.

    My suggestion: Target a specific *reduction* in both personal and corporate taxes that’ll benefit everyone. Then make it clear that “green” taxes are being used to replace that revenue.

    [1] Officially the second most rural constituency in the country, out of about 500.

  5. You don’t need to massively increase the gas tax. The whole point of a free market economy is that the prices will rise on their own as necessary. Because of that, people will develop the necessary efficiencies. I see no reason why a tax is needed to exacerbate that process.

  6. It also occurs to me that a tax on gas amounts to a tax on a huge number of goods in the market, due to transport and shipping costs. If you raise gas prices, don’t get too surprised when you have to pay more for your next online purchase, or your next in-person purchase of a product that came into the store by truck. And unlike people-moving, few short-term alternatives exist for moving products around. Until we have a viable infrastructure for alternative fuel of some kind, industry has no real alternative to move products around other than gas-powered transport mechanisms.

  7. Your reasoning is sound micro economics reasoning. For price changes, Slutsky decomposed the change in consumer asset allocation into two effects, substitution effect, and income effect, see http://en.wikipedia.org/wiki/Slutsky_equation.

    The income effect can be offset by lump sum payments. However, this scheme only works if the consumers fail to act as a group. Otherwise the assumptions that model the consumer’s allocation decision become unsound (as he assumes a fixed income). But probably we can model that using a bit of game theory. A few million people prisoners dilemma anyone? :)

  8. Why revenue neutral? To appease the Republicans? They won’t agree to anything like this anyway. We can quickly solve the Social Security problem by using a much increased gas tax to pay for SS and Medicare with the added benefit that it will dramatically reduce consumtion as people find other ways to commute. Increase teh gas tax now!!!

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