The Gas Tax Trial Balloon

Townhall ^ | 10/26/06 | Alan Reynolds

[Molly Pitcher]

The newspapers are suddenly full of hypothetical plans to sextuple the federal gasoline tax, with well-timed insinuations that this might be a post-election Republican ploy. On Oct. 8, The New York Times ran a story called, "Raise the Gas Tax? Funny, It Doesn't Sound Republican," citing half a dozen Republican economists and a token Democrat. On Oct. 20, The Wall Street Journal ran "Raise the Gas Tax" by former Bush adviser Greg Mankiw.

As taxes go, a tax on motor fuels (including ethanol) is not one of the worst. Mankiw thus argues that, "An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth." Yet he does not propose to reduce reliance on income taxes. And a tax-induced increase in the cost of transportation of goods, workers and shoppers is surely not favorable to economic growth.

Whether or not a dollar increase in the gas tax would be less damaging to the economy than, say, raising the minimum income tax rate from 10 percent back to 15 percent is not obvious.

Mankiw's most telling argument is that "a $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue." By 2016, however, taxes will be up to $4.1 trillion, according to the Congressional Budget Office (CBO), so Congress might just misplace an extra $100 billion.

Mankiw hopes to use that loot to pay Social Security and Medicare benefits for his generation. But two flat taxes on payrolls were intended for that purpose, and delinking those taxes from the benefits will not boost public support for those collapsing programs. A big problem with phasing in a gas tax increase over 10 years is that young motorists vote.

New York Times columnist John Tierney had a more viable idea a year ago. He proposed raising gasoline taxes by 50 cents, but only if and when gas prices fell -- "an extra dime of tax per gallon whenever the retail price falls by 20 cents." He also proposed that every dime of extra revenue would be tightly earmarked to go into private savings accounts for every adult citizen (or perhaps children, too) with a Social Security number.

When economists speak favorably about an increased gas tax they are often saying, correctly, that it would be more effective and less damaging than corporate average fuel economy (CAF) standards and the gas-guzzler tax (on cars, not SUVs).

A 2004 Congressional Budget Office paper concluded that if CAF standards were raised by 3.8 miles per gallon, it would take 15 years for gasoline consumption to fall by just 10 percent, and the economic cost would be high. Raising the gas tax by 46 cents would also cut fuel consumption by 10 percent, but do so much more promptly.

Mankiw's other arguments are expressed in high-sounding terms as a case of "Pigovian taxes," named for economist Alfred Pigou. A Pigovian tax assumes politicians and their economists have the knowledge and motivation to discern when people are buying too much of something, because they fail to take account of the "social costs" their purchase imposes on others. Assuming such wisdom exists, the government can supposedly use selective sales taxes as a tool of behavioral modification. Yet the CBO noted that a 2002 National Research Council estimate of the Pigovian "external costs" of consuming gasoline amounted to just 26 cents a gallon -- less than the average federal-state tax of 41 cents.

The real motive behind high taxes on liquor, tobacco and gasoline is more plausibly related to "Ramsey taxes," named for philosopher Frank Ramsey. Pigou might have argued that we should tax wine to discourage excess drinking. Ramsey would argue that we should tax wine precisely because the demand for wine is relatively unresponsive (inelastic) to a higher price. Because a tax on wine, tobacco or gasoline does not have a strong effect on consumption, such taxes are "efficient" in the sense that they yield the most revenue with the least distortion of the way resources are used (unless they result in black markets).

Governments like to claim they raise these "sin taxes" to discourage drinking, smoking and driving -- as though driving to work is a sin. In reality, governments like these taxes because their effect on consumption is weak. And the real reason the federal government has not pushed this tax much higher is that doing so would pre-empt and reduce an important source of state revenue.

Mankiw wants to raise the gas tax twice as much as the CBO estimated, which might cut gasoline consumption 20 percent from where it would otherwise be a decade from now. But that would be only a 5 percent cut from current consumption. That couldn't make a noticeable difference in global warming because U.S. passenger vehicles account for only 20 percent of carbon dioxide emissions. Even a 20 percent cut in 20 percent is only 4 percent, and the United States is only part of the globe.

It would not make a huge difference in domestic oil consumption either, because passenger vehicles account for only 40 percent of U.S. oil demand. A 20 percent cut in 40 percent is only 8 percent. From such a trivial change, Mankiw imagines "the price of oil would fall in world markets." But that undermines his environmental arguments. If the world price of oil fell, then China and India would use more oil and global emissions would not decline.

Claiming to remedy social costs with higher taxes is a game with no clear rules. Using Pigovian logic, I would argue that wine purchases should be tax-free and tax-deductible, because wine is so beneficial to public health and sociability that private demand fails fully to reflect it social value. Nobody could prove me wrong because all such analyses of social benefits and costs are incurably opinionated. Yet I will never be asked to testify on the Pigovian merits of a tax break for wine because federal and state governments crave the money a wine tax brings in.

This, too, is all about the money: If you have some, the government wants it. But they aren't doing such a great job with what they have are they?

[Molly Pitcher]

GRRRRRRRRRRRRRRRRR...just the thought!

[Toby06]

Hey, they kept saying Bush would institute a draft. Never happened.

[saganite]

"A Pigovian tax assumes politicians and their economists have the knowledge and motivation to discern when people are buying too much of something"

What an aptly named tax for politicians slopping at the Federal trough! This sounds like Hillary's "we're going to take something away from you for the common good" statement. I propose they rename it the "Pigovian Hillary" tax.

[sgtbono2002]

All of this seems to be coming from this guy Mankiw ,who was a FORMER Bush advisor and the blame is trying to be laid on Republicans.

I have seen taxes earmarked for things before. I saw the Lotto earmarked for schools and spent by democrats for a new stadium in Baltimore. I have seen gas taxes earmarked for highway improvement and driven over the old worn out ones.

[gridlock]

If a gasoline tax were offset by tax cuts in other areas, such as income taxes, I would favor it. It would place more of the societal burden of gasoline consumption (road construction and maintenance, environmental remediation, etc.) on the actual consumer. This would be less distorting to the economy, and thus a good thing. People would consume less, automobiles would become more efficient, and societal costs would be reduced, in response to the higher cost.

However, the problem lies in the fact that a new tax is NEVER offset by reductions in other taxes. It is always just a new income stream, and is often earmarked for some high-sounding purpose, and the old funding streams remain intact. Thus it becomes just one more money grab by the politicians, and should be vigorously opposed.

[Smokin' Joe]

New York Times columnist John Tierney had a more viable idea a year ago. He proposed raising gasoline taxes by 50 cents, but only if and when gas prices fell -- "an extra dime of tax per gallon whenever the retail price falls by 20 cents." He also proposed that every dime of extra revenue would be tightly earmarked to go into private savings accounts for every adult citizen (or perhaps children, too) with a Social Security number.

Um, we allegedly had a "savings account" in Social Security. What, we should let the government dip into our pockets again for another one? No. I'd much rather keep my money and save it myself, thankyouverymuch.

Otherwise, I think I can market coyotes as guard dogs for poultry farms to these suckers.

[theBuckwheat]

We are only fooling ourselves, and in the end will pay for it in other ways, if we think we can have government provide something to us but charge ourselves less for it than it really costs. If we must have highways and bridges that are in good repair we must pay the bill or find an alternative.

Having said that, in previous years, the federal motor fuel tax was used abused by Congress and the Executive in several ways:

- It is a tax. It has always been a tax. This means that every penny goes into the General Revenue and thus (like Social Security), gives us the illusion that the budget deficit is not nearly as horrid as it really is.

- It is a "trust fund", like Social Security. This means it "accumulates" but only on paper because the funds go into General Revenue to be spent (or not) later. Congress gets to use the same money in a political sense more than once! They used it to suppress the deficit and they get to use it again to show what good stewards they are when they can point to the "trust fund" (that doesn't really exist).

- It is appropriated. Congress gets to hold hearings, accept favors from lobbyists, wield power, be shown "fighting" for his state's "rightful share", be the gatekeeper and most importantly get special, high visibility projects earmarked, like an important bridge to an almost uninhabited island in Alaska.

- The size of the "trust fund" has been like the smell of rotting road kill to vultures and flies. No end of non-highway uses have been proposed for spending. Under the theory that it reduces highway congestion, highway funds have been used for funding mass transit.

Again, if we need highways, we must pay for highways. There is no free lunch. But as can be seen from the above, we are paying a large tip every time we sit down. Even so, if costs go up, the tax must also, or else we will end up with crumbling and dangerous roads, roads that will maim and kill.

The sad observation I would make is that the left scolds us (and praises themselves for doing so) that we would be far better off if our fuel prices were as high as they are in Europe, where fuel is taxed to fund general government. Even though it was the high luminary Albert Gore, who ran for President who wrote such a suggestion in his book, Earth in the Balance, when fuel prices recently hit $3 a gallon, he and those who cheered such scolding were strangely silent. Now, they clamor to hold hearings to discover if oil companies are responsible for such high prices. Go figure. The high price was not to benefit the ecosystem through reduced consumption, it was to benefit government through greater taxes. Happily, or present fuel tax structure did not directly boost tax revenues, so there was no advantage to it, except of course profits are taxed. Al Gore's silence tells me all I need to know.

[erics-chi town]

A tax on gasoline is unfair as a large part of our population live in major cities in which most people don't drive or own cars. This would be a tax on suburbia. If they are considering a National tax, only a sales tax would be fair.

Of course I'm not in favor of ANY new taxes!

[robertpaulsen]

This is our fault. We've demonstrated that we're not willing to change our driving habits even when we're paying $3/gal.

Now that gas is $2/gal, why not add an extra 50 cents to it? Hell, we'll pay it.

(It's funny, though, how the government never even considered temporarily reducing or eliminating the tax when it was $3/gal.)

[Alberta's Child]

What makes this discussion so silly is that the gasoline tax is slowly losing its appeal as a source of revenue period.

I attended a conference of highway engineers and trasnportation agency officials last spring, and was shocked to find out that so many people in this group -- which has long been one of the strongest supporters of fuel taxes as a source of revenue for transportation projects -- were adamantly opposed to the idea of raising fuel taxes.

In fact, it was quite the opposite. There is a recognition among a lot of these folks that a fuel tax is likely to be one of the most unreliable sources of revenue in the future -- mainly because so many other government initiatives and regulations (fuel efficiency standards, for example) actually result in LOWER revenue.

[MNJohnnie]

If the Republicans win Nov 7th, not a chance of passage, if the Democrats win, you can count on it being part of their 1st round of tax hikes

[sully777]

The Federal gas tax made Clinton very popular in 1993 -- NOT! But was it ever reversed? Even when gasoline was over $3 nationwide and over $4 in certain high gas states?