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Monday, December 29, 2008

The Gas Tax: Good Idea, Terrible Timing

Charles Krauthammer has a provocative idea to achieve energy independence, a gas tax.

So why even think about it? Because the virtues of a gas tax remain what they have always been. A tax that suppresses U.S. gas consumption can have a major effect on reducing world oil prices. And the benefits of low world oil prices are obvious: They put tremendous pressure on OPEC, as evidenced by its disarray during the current collapse; they deal serious economic damage to energy-exporting geopolitical adversaries such as Russia, Venezuela, and Iran; and they reduce the enormous U.S. imbalance of oil trade which last year alone diverted a quarter of $1 trillion abroad. Furthermore, a reduction in U.S. demand alters the balance of power between producer and consumer, making us less dependent on oil exporters. It begins weaning us off foreign oil, and, if combined with nuclear power and renewed U.S. oil and gas drilling, puts us on the road to energy independence.

High gas prices, whether achieved by market forces or by government imposition, encourage fuel economy. In the short term, they simply reduce the amount of driving. In the longer term, they lead to the increased (voluntary) shift to more fuel-efficient cars. They render redundant and unnecessary the absurd CAFE standards--the ever-changing Corporate Average Fuel Economy regulations that mandate the fuel efficiency of various car and truck fleets--which introduce terrible distortions into the market. As the consumer market adjusts itself to more fuel-efficient autos, the green car culture of the future that environmentalists are attempting to impose by decree begins to shape itself unmandated. This shift has the collateral environmental effect of reducing pollution and CO2 emissions, an important benefit for those who believe in man-made global warming and a painless bonus for agnostics (like me) who nonetheless believe that the endless pumping of CO2 into the atmosphere cannot be a good thing.

Now, within the body of the piece itself, Krauthammer makes the case that his idea is purely theoretical. That's because he knows that no politician would ever support it because its support would mean the death knell of their political career. Americans simply won't stand for a politician making their gas bill higher.

Still, a gas tax is an excellent tool in trying to make this country less dependent on foreign oil. All taxes provide incentive or lack thereof. If there was a higher tax on gasoline, consumers would use less of it. Car manufacturers would be more motivated to make cars that run on alternative. An increased gas tax is an excellent way to make our country more energy independent.

Yet, right now is the worst time for such an idea. First, Krauthammer is among many Conservative pundits that has spent the better part of the last year blasting Obama for suggesting a tax increase on the wealthiest Americans. Like most Conservatives, Krauthammer points out how foolish it is to raise taxes in the middle of a recession. Well, a tax increase is a tax increase. It's hard to measure what impact such an increase would have on our economy, but it goes without saying, that the impact will be contractionary. During a recession, the last thing anyone should do is raise taxes on anything. As such, this is a totally counter productive idea at the time. Right now, the main priority for everyone is navigating this economy out of the recession. Noble goals like energy independence must take a lower priority now. We have no room for energy independence if the current price is weakening our economy even further.

Furthermore, oil and subsequently gas are both selling at a relatively low price right now. Unless this tax is extremely punitive, its effect will be marginal. Gas is about $1.65 a gallon. Adding another 20 or 25 cents will do little to change our behavior given its current price. What it will do is put less money into the pockets of struggling Americans that could certainly use those 20 cents per gallon in other ways. One of the few bright spots in this recession is that gasoline prices have plummetted. This at least provides Americans with relief when they fill up their tank. If they don't have relief there either, American's budgets will become even tighter and all this will do is prolong the recession even more unnecessarily.

A punitive tax of say a Dollar or more would be devastating. Can you imagine if Americans had to pay $3 a gallon and more for gasoline right now. No one would have any money for anything. Such a tax would all but guarantee that this recession turns into a depression. That's why a gasoline tax is a good idea at the worst time right now. It should be revisited when this economy recovers but not before.


Anonymous said...

There is a simple solution. Drastically lower the FICA on employers and employees, which would more than offset the expense of the added gas tax, and give the economy a kick in the pants. I am a conservative also, but I am all for this idea. We are funding the terror supporting countries that we are fighting overseas. How insane is this?

mike volpe said...

I believe FICA goes to fund Social Security so you would be opening up a pandora's box if you did that. Certainly, you could cut taxes elsewhere, however I am no fan of any tax increase in a recession. Right now is not the time to think about energy independence. Our only priority is making it through this recession. Once the economy turns, then we can try something like this.

Anonymous said...

Dave hits a point though. Balancing the hit with a matched decrease elsewhere would be a good idea. I am quite conservative, and a gas tax in my opinion is the FAIREST of all taxes.

Further, I would expect a $0.40-0.50 tax would see only a fraction of its face value at the pump due to market prices dropping to compensate anyhow.. Money out of the hands of those who don't like us (their customers) very much.

Jack McHugh said...

You left out a key point though, which is that Krauthammer is proposing REVENUE NEUTRAL gas tax, with the offset coming from payroll taxes. I think the offset should be from supply-side marginal income tax rate cuts, indexing cap gains, etc., but that's OK - let's make a deal and split the diff. The bottom line is, either way this would replace economically destructive taxes on working, saving, investing and entrepreneurial risk taking, with an economically neutral or even beneficial consumption tax. Never mind energy policy - it's good economic policy.

Caveat: The tax shift should be phased in gradually. My preference is for a carbon tax on all forms fossil fuel, imposed at the point of sale to consumers so that it is completely transparent. It should ratchet up by 25 cents a year or so until it's like $5 per gallon (and proportional levels on coal and gas). In addition to the supply side tax cuts there should be means-tested refundable tax credits (or even "prebates") to avoid dunning po' folk who don't pay income (or payroll) taxes. The goal is for every income level to be no better or worse off IN THE AGGREGATE - individuals who use more than the average amount of energy will pay more, but that's their choice. If they don't like it, they can change their behavior. That should make the greenies happy too.

mike volpe said...

Unfortunately, taxes just don't work like that. There is no way to predict exactly what impact a tax may or may not have. A gas tax affects consumers and businesses. It raises costs on thousands of businesses. There is no way to know just what impact it may have. Now is not the time to raise any tax. Now is the time to cut taxes. I am all for cutting taxes. This is not cutting taxes. This is raising one tax at the same time you cut another. There is no way to predict what economic impact that may have. In this time of extreme economic uncertainty, that is not a good idea.