Is This a Good Time to Raise Taxes on Gasoline? Becker

When we blogged about gasoline taxes on July 21, 2008, the sharp rise in gasoline prices to over $4 a gallon reduced the gasoline consumption that contributes to global warming, local pollution, auto accidents, congestion, and other externalities from driving. I suggested that if it were desirable to use gas taxes to reduce gasoline consumption, a better time would be when gasoline prices were much lower. In the little over five months since that discussion, average gasoline prices in the United States have declined by more than 60 percent to about $1.50 a gallon. In light of the July discussion, is this a good time for the federal government, perhaps particularly for local and state governments, to raise gasoline taxes? I believe that despite the free fall in gas prices, other events since that earlier posting have greatly weakened the case for higher gas taxes at this time. I have opposed the bailout of GM, Ford, and Chrysler through federal loans and outright grants, and believe these companies should have been allowed to go into bankruptcy proceedings (see, e.g., my post on Dec. 16th, 2008). However, given that President Bush started a bailout, and that the new Congress is likely to extend the bailout, this would be a bad time to raise gas taxes. For higher gas prices will increase the financial difficulties of the American automakers by reducing driving and shifting demand away from the SUVs, minivans, and trucks that these companies have depended on for much of their revenues. A further weakening of the financial position of American carmakers would increase the size of the bailout of the American auto industry needed to prevent it from going bankrupt. This implies that higher gas taxes would have a multiplier effect on the tax burden facing American families and businesses- not only would they have to pay more for gas, but they also would at some point have to pay higher taxes to finance a larger bailout. A related reason to avoid raising gas taxes now that was not so apparent when we blogged in July is that the world is in a serious recession that will get worse before it gets better. Many lower and middle-income families have lost their jobs, and many more will suffer reduced incomes during the coming months. Since increasing numbers of individuals are facing more difficult economic circumstances, this hardly is the time to raise taxes on cars used to commute to work and to shop, especially since higher gas taxes would lead to greater government spending on bailing out American carmakers. Fiscal policy during a recession should, if anything, cut rather than raise taxes, be they taxes on gasoline, personal incomes, or business. President-elect Obama has reached a similar conclusion. The New York Times of Jan. 3 reported that when he was asked last month whether he would consider a much larger federal tax on gasoline, given the sharp fall in gas prices, Mr. Obama replied that American families were hurting because of rising unemployment and falling home values. They quote him as saying "So putting additional burdens on American families right now, I think, is a mistake". Some proponents of the bailout to automakers want to make payments to GM, Ford, and Chrysler conditional on their making cars that are more friendly to the environment through getting greater miles per gallon of gasoline used. One frequently suggested way to do that would be to raise the Corporate Average Fuel Economy (CAFÉ) requirements at a more rapid rate than under present law. CAFÉ standards are presently at 27.5 mpg for cars, and 22.2 mpg for pickups, SUVs, and minivans, and they are scheduled to rise to much higher levels starting in 2011. Since foreign carmakers are better at making fuel-efficient cars than are American companies, any sharp increase in CAFÉ requirements would further weaken the competitive position of the American companies. Hence, this too would defeat the alleged purpose of the auto bailout, which is to help American companies reduce their financial problems, so that they can compete more effectively against foreign automakers. Although neither higher gas taxes nor tougher fuel-efficiency standards are desirable at this time, higher taxes would be preferable to tougher standards. Both hurt GM and the other American car manufacturers, but bigger taxes are a more efficient way to economize on the use of gasoline. Higher gas prices encourage consumers to drive fewer miles with the cars they already own, especially SUVs and other gas-guzzlers. Higher gas prices also give consumers an incentive to shift purchases of new cars to more fuel-efficient cars. Bigger gas taxes stimulate greater investments in R&D to produce better hybrids, battery-driven cars, and other types of cars that rely less on gasoline. In essence, raising the tax on gasoline encourage consumers and businesses to economize on all their margins of adjustment. Tougher fuel standards encourage economies in the use of gasoline only by mandating the production of cars that get more miles per gallon of gasoline used. However, unlike what happens with higher gas prices, owners of more fuel-efficient cars will increase rather than decrease how much they drive precisely because these cars are more fuel-efficient. That partly offsets the reduction in gas consumption from driving more efficient cars.

Comments

[Goose]

It is my understanding that the purpose of a regulatory excise tax like the gasoline tax is two-fold: to decrease demand for the product being taxed and thus decrease its associated negative externalities, and to raise revenue that can be used to combat those externalities. In a perfect world, the amount of revenue raised will be just enough to offset the externalities caused by consumption of the product, and this makes good sense to me. Nowhere do I see room in this analysis for factors such as the general state of the economy or industry; it seems that if a gasoline excise tax is a good idea, then it is a good idea in any economic circumstance.

That being said, the gasoline tax is a regressive tax that hurts low and middle income wage earners -- just the folks who the state should be seeking to insulate from the recession -- more than high income individuals who are better able to handle an economic downturn. If delaying the implementation of an otherwise desirable gasoline excise tax is a good idea, then perhaps the temporary suspension of other beneficial regressive taxes such as those on cigarettes and alcohol -- as well as state sanctioning of lotteries and gambling -- is something worth thinking about.

[Goose]

It is my understanding that the purpose of a regulatory excise tax like the gasoline tax is two-fold: to decrease demand for the product being taxed and thus decrease its associated negative externalities, and to raise revenue that can be used to combat those externalities. In a perfect world, the amount of revenue raised will be just enough to offset the externalities caused by consumption of the product, and this makes good sense to me. Nowhere do I see room in this analysis for factors such as the general state of the economy or industry; it seems that if a gasoline excise tax is a good idea, then it is a good idea in any economic circumstance.

That being said, the gasoline tax is a regressive tax that hurts low and middle income wage earners -- just the folks who the state should be seeking to insulate from the recession -- more than high income individuals who are better able to handle an economic downturn. If delaying the implementation of an otherwise desirable gasoline excise tax is a good idea, then perhaps the temporary suspension of other beneficial regressive taxes such as those on cigarettes and alcohol -- as well as state sanctioning of lotteries and gambling -- is something worth thinking about.

[Goose]

Apologies for the double-post :(

[Mike Livefright]

I would suggest that there be a Gas tax that was possibly implemented over 5 years at say $0.50/ gal. per year and that the money collected either be totally rebated on a per person basis or perhaps be invested as a ROTH 401k payment into an indexed fund.

That way it would be committed so that people and auto companies would plan their future based on A $2.50 tax and the plan would be revenue neutral so that it would not directly effect the national economy.

[Jeff S]

I think everyone agrees that now is not the good time to put a tax on gas consumption. Personally, I'm against it unless the gas tax comes along with a proportional cut in less-efficient (We don't have to debate what that is. I don't want to start a Supply Side vs. Egalitarianism debate) or less-desirable tax such as income tax (claims it distort incentives) or even the payroll tax (ease unemployment). If the tax is hiked gradually over the long run people should be able to adjust.

I think putting strings on the bailout to produce more efficient car will have little effect on both GM's health and gasoline consumption along with its externalities. GM is not bankrupt because they only produced gas guzzlers. All manufacturers, even foreign, are cyclically sensitive. None of them are doing well. However, GM has structural problems with their fixed costs they're hopefully in the process of resolving. GM was not stupid enough to think SUVs were going to be their bread and butter forever. Their fixed costs were too high to ride through current credit crisis. This was not because they failed to make a Prius competitor in 2008. Most hikes in cafe standards burden the consumer with the manufacturers' costs of R&D and production to get compliant. If you look at auto sales, no one is demanding the high fuel standards that congress and public shamed them for not achieving. The bulk of sedan sales are usually with the standard powertrain. Depending on the price of gasoline and the lease, the hybrid is not always the best value (ignoring any environmental utilities). Gas tax is the only way to encourage production and demand for efficient vehicles.

I'm disappointed I never once saw the word Pigouvian in this single post.

[VZJohn]

Äîñòàòî÷íî èíòåðåñíî, ÿ âîîáùå íå î÷åíü ëþáëþ áëîãè íî ýòîò ÷èòàþ ñ óäîâîëüñòâèåì!

[Mike Liveright]

I would suggest that there be a Gas tax that was possibly implemented over 5 years at say $0.50/ gal. per year and that the money collected either be totally rebated on a per person basis or perhaps be invested as a ROTH 401k payment into an indexed fund.

That way it would be committed so that people and auto companies would plan their future based on A $2.50 tax and the plan would be revenue neutral so that it would not directly effect the national economy.

[USJerry]

Ìíå íðàâèòñÿ ôóòáîë, à ìóæ÷èíû, âêëþ÷àÿ òåõ, êòî îñòàâëÿåò êîììåíòàðèè, âñå ïîãîëîâíî ôàíàòû ôóòáîëà. Ïîýòîìó õî÷ó çàäàòü âîïðîñ. êàê Âû äóìàåòå, òî ÷òî Ðîíàëäèíüî ïåðåõîäèò èç Áàðñåëîíû â Ìèëàí, ýòî ïîëîæèòåëüíî ñêàæåòñÿ íà åãî êàðüåðå, è íà èãðå íîâîãî êëóáà, èëè…?

[UZDaniel]

Áëàãîäàðþ âàñ, î÷åíü ïðèÿòíî áûëî ïðî÷èòàòü, è ñäåëàòü äëÿ ñåáÿ îïðåäåëåíûå âûâîäû.

[Terry Johnson]

The use of higher CAFE standards are indirect levers which only distort the market and provide advantages to foreign competitors.

CAFE standards are politically easier to enact than raising of gasoline taxes. It is the easiness which should have us moving uncomfortably in our seats.

If you/(we) are serious about reducing fuel consumption than we should be honest enough to have a full and open debate on the issue and make decisions in the full light of day.
If higher fuel taxes are necessary: let's discuss the matter and make a decision one way or the other.

[Dave]

Wouldn't it be simpler just to put up check points and road blocks to prevent people from driving where they want?

[sethstorm]

How about cutting these taxes, and on a permanent basis?

Not all of us want to drive European-inspired golf carts. There are plenty of ways to make those large vehicles fuel efficient yet still look/feel like nothing was changed.

Cut this tax and tell the Sierra Club to start hugging trees with their SUV's.

[sethstorm]

How about cutting these taxes, and on a permanent basis?

Not all of us want to drive European-inspired golf carts. There are plenty of ways to make those large vehicles fuel efficient yet still look/feel like nothing was changed.

Cut this tax and tell the Sierra Club to pound sand.

[sethstorm]

How about cutting these taxes, and on a permanent basis?

Not all of us want to drive European-inspired golf carts. There are plenty of ways to make those large vehicles fuel efficient yet still look/feel like nothing was changed.

Cut this tax and tell the Sierra Club to pound sand.

[Jack]

I, reluctantly, agree that now is not the time to increase gas taxes for the reasons mentioned.

I'd add to the reasons the fact of our just having built this fleet of miserable gas hogs at great cost (Ha! WAS this a conspiracy? Econ terrorism??) and most people would not be able to adapt to higher gas taxes by trading their vehicles in the near future anyway. For many the "car of the future" does not exist. My guess is that we'll see a broad mix of cars from the much ballyhooed plug-ins to CNG and more; so it seems short-sighted to throw away our existing rigs only to invest in halfway "solutions".

But...... I have been a fan of moving a portion of the income tax burden to fossil fuels for 30 years or so. Doing so would have the obvious effect of lowering consumption and increasing the efficiency of our cars, trucks buildings and even farming methods. It seems less obvious to most that income taxes make it difficult to hire each other. This effect is most apparent for individual home owners as business has the advantage of being able to deduct the costs of employing professional help while homeowners do not. The result is that of creating a high incentive toward "doing it yourself" as compared to specialization.

So, I too lean toward a ramping up of fuel taxes over time which should now include carbon tax elements which businesses too would pay w/o deduction. Still, many people are not sensitive to small gas taxes so something akin to the CAFE standards and gas guzzler excise taxes should be refined and retained.

Could it be that America MIGHT be able to think longer term and act now so that we might PLAN our future decisions?

[Jack]

I, reluctantly, agree that now is not the time to increase gas taxes for the reasons mentioned.

I'd add to the reasons the fact of our just having built this fleet of miserable gas hogs at great cost (Ha! WAS this a conspiracy? Econ terrorism??) and most people would not be able to adapt to higher gas taxes by trading their vehicles in the near future anyway. For many the "car of the future" does not exist. My guess is that we'll see a broad mix of cars from the much ballyhooed plug-ins to CNG and more; so it seems short-sighted to throw away our existing rigs only to invest in halfway "solutions".

But...... I have been a fan of moving a portion of the income tax burden to fossil fuels for 30 years or so. Doing so would have the obvious effect of lowering consumption and increasing the efficiency of our cars, trucks buildings and even farming methods. It seems less obvious to most that income taxes make it difficult to hire each other. This effect is most apparent for individual home owners as business has the advantage of being able to deduct the costs of employing professional help while homeowners do not. The result is that of creating a high incentive toward "doing it yourself" as compared to specialization.

So, I too lean toward a ramping up of fuel taxes over time which should now include carbon tax elements which businesses too would pay w/o deduction. Still, many people are not sensitive to small gas taxes so something akin to the CAFE standards and gas guzzler excise taxes should be refined and retained.

Could it be that America MIGHT be able to think longer term and act now so that we might PLAN our future decisions?

[Jack]

Sethstorm?? If you've "plenty of ways" to make large cars "fuel efficient" I suspect you could command quite a salary in Detroit as they're a bit stymied on traditional gassers; perhaps a new Chevy Volt will fill your needs.

Today, it looks as though "the Sierra Club" has lots of company in their concern over air pollution and green house gases, but at $100 plus prices the immediate concern is that of going broke while "investing" heavily in developing the economies of OPEC while our own continues to unravel.

[Paul]

Short term thinking has got us where we are. Now is the time to think about the long term (or at least the midterm of the next few decades). Do you think there will be more or less easily accessible oil in 2020 than today? While it's not a guarantee, my bet is on more expensive oil and less of it. Let's build a transportation system for that environment.
The argument that this is going to require new and unproven technologies is a smokescreen. Internal combustion engines have become much more efficient in the last 20 years and yet the mpg has remained much the same. The advances have gone into increased horsepower and weight.
Phase in a gas tax and better CAFE standards. Let's not put off the change for another 10 years when it's even more painful.

[Richard]

I hope that the federal government will stop throwing good money after bad, pretty soon, and cut off aid to the auto industry. That would eliminate that argument from Dr. Becker’s case against raising gasoline taxes.

The argument against raising taxes during a recession seems to make sense. That is cited as one of the factors that turned a recession into the Great Depression 80 years ago. However, we could perhaps offset a gas tax increase against decreases in other taxes.

I like Judge Posner’s suggestion of approaching energy taxation on a broader basis than just a gasoline excise tax increase. The issues of environmental effects, and dependence on imports from difficult foreign countries, also apply to energy uses other than automobile use. A broader tax, such as a carbon tax, would address all of those areas.

Issues specific to driving, such as traffic congestion in urban areas, could be dealt with by increased use of tolls.

[DamonDC]

Êñòàòè, àäìèí. Âîò ÿ òåáÿ ñïàìëþ, à ìåíÿ íå áàíÿò. Ïðîñïàì ïî âñåéáàçå äàâàë ìàêñèìóì 170 òèö. Èíòåðåñíî? Èùè ìåíÿ %)

[Alex Martelli]

I commented on Posner's blog first so I'm only now seeing Jeff S's remark on "Pigouvian" possibilities (I agree, except I'd spell it "Pigovian";-), quite similar with what I wrote to Posner. So I'll add one more bit: Thomas Friedman's article at http://select.nytimes.com/2007/01/10/opinion/10friedman.html?_r=1 quoting Montana governor Brian Schweitzer's idea to "Set a floor price for crude oil in the U.S. at $40 a barrel forever. That will tell Wall Street that if it invests in new, clean coal technologies — which can be run profitably at the equivalent of $40 a barrel — OPEC will never undercut them".

Apart from the debate on whether clean coal in particular is a workable technology (Montana obviously has a bias towards "yes";-), the price floor aspect is the key bit -- crucial to any future private sector investment in alternative energy and conservation, and so much better than having the gov't pick winners and losers among clean coal, nuclear, solar, wind, etc, by direct subsidies. We must sap the Saudis' ability to periodically destroy such investments by having oil prices crash (the rest of OPEC is too greedy for that, but the Saudis play a long game and have the leverage to make it happen -- that the side effects of such undeclared price wars deeply wound Iran, Saudi Arabia's main regional competing power, is a sweetener). Again, directing the income from such a floor-price tax to alternative energy subsidies is NOT ideal (I'd rather see payroll taxes cut deeply), but in any case as long as the whole package is revenue neutral the current recession should be no bar to it, no?

[Jamesq]

I'm surprised neither the blogger nor the various commentators have mentioned the national security aspects of American oil consumption and the transfer of wealth to the anti- democratic regimes which supply our oil. The direct beneficiaries of the transfer (by far the largest in human history) include countries which fund terrorism directly (e.g., Iran, Saudi Arabia) indirectly (Russia) both directly and indirectly (Venezuela) and historically, though not, perhaps, at the moment (Libya).
Our dependence on these suppliers has hamstrung our ability to have a coherent foreign policy-- witness, for example, our categorization of Saudi Arabia as a "moderate" Arab state and our inability to respond to Russia's transfer of nuclear technology to Iran.
A gasoline tax could, and, by political necessity, would, be very much a voluntary tax, through application system of partial credits and simultaneous reductions in payroll taxes. The revenues, such as they are, could be applied, again through a system of credits, to conversion of our national rolling stock to carbon neutral fuels such as algae based biodiesel etc. or carbon producing, but less dirty domestic fuels i.e., LNG.
Our economic and, hence, our national security demand an end to dependence on foreign oil and the debate must be framed in that context.

[Mark A. Sadowski]

The regressive problem of a gas tax hike has been addressed by none other than Charles Krauthammer (I was a little surprised by the source myself). He proposed something called a Net-Zero Gas Tax. Essentially the revenue raised by such a tax would be offset by a corresponding reduction in the amount raised in payroll taxes. Thus it raises one regressive tax and reduces another.

[Chris Graves]

I can see the point to raising taxes on gasoline as a user fee so that the funds gathered from these taxes would be dedicated to road and bridge maintenance and repair. Such a tax increase could also have salutary side-effects such as reducing carbon emissions and reducing congestion as both Professor Becker and Judge Posner argue. I can also see Professor Becker's point that we should delay implementing an increase in the gasoline tax due to the present economic downturn.

What I would also argue for, in due time, is a price floor on gasoline to provide incentives for entrepreneurs to develop alternative fuels. Normally, I would oppose such measures as I am proposing, but the externalities that have emerged from oil are too great to simply let alone. The most notable externality is the political volatility of the Middle East. Since we import significant amounts of oil from Saudi Arabia as well as other Middle Eastern sources supplying other industrial nations with oil, freeing up other sources for us, we must look for ways to disengage from the Middle East. Much of the underlying reason for terrorism is rooted in our involvement in the Middle East to keep oil flowing.

In calculating the full price of oil, we must include much of our military budget. Given those costs, a price floor to encourage the development of substitutes for gasoline would be cost effective over time.

[neilehat]

Why is it that almost everyone thinks that the Internal Combustion engine's fuel efficiency is unlimited. The reality is, that the design engineers have just about maxed that efficiency out. If you're going for greater efficiency, one is going too have to invent the perpetual motion machine, develop other types of Prime Movers or radically alter the Transportation Culture and the lifestyles on which it depends.
No easy task.

Now, turning to "Taxation", the low prices we're seeing today are an anomaly. When the Crude prices jump, which they will, the gas prices with additional taxation will be above five dollars a gallon. Now how is this going to help revive a Consumer Based Economy? Other than drive it deeper into Depression.