What? A Sensible New Gas Tax Proposal?

February 3rd, 2009

lugarNot by President Obama but by Senator Richard Lugar (R, Ind.) and Charles Krauthammer, Mr. Conservative. Our cup runneth over.

With Republicans everywhere bellowing for tax cuts, it is becoming clear that the only way to get the auto industry back on its feet is with a hefty tax on gasoline. Senator Lugar, following Krauthammer’s interesting proposal for a “net-zero” tax cut, agrees. More on that marvelous reversal in a moment.

Panayoti, contributor to a long comment thread we began in this blog, has been trading ideas with me about how to get out of the emissions/mileage standards/oil consumption bind that puts both consumers and the car industry at the mercy of oil prices. He recently sent along auto critic Mark Phelan’s piece in the Detroit Free Press, which points out the holes in California’s proposed tough standards. Some kind of compromise, Phelan thinks, is likely if not inevitable.

can-of-wormsI think that’s what the Obama folks were looking for all along. But stringent regulation opens about four cans of worms. The government should never be in the position of forcing fuel-efficient but costly cars on the public when gas prices are low. Regulations like the CAFE standards will not work, particularly in a recessionary market.

And then, people want SUVs when gas prices are low, hybrids when they’re up. The industry retools at enormous cost and, like the banks, ends up with frozen, if not toxic, assets.

Looking at all the negatives about whipsawing the auto industry to meet demand, damaging the environment, being addicted to oil and vulnerable to odoriferous foreign powers—it’s hard to conclude that a nice fat gas tax couldn’t solve most of these problems. But, as Mark Phelan said to me, “Everybody seems to agree a gas tax is the most straightforward way to reduce fuel consumption and emissions, but there also seems to be a consensus that the politicians won’t do it.”

Think about a driver’s joy in being whacked with a $2/gal tax in times like these. That’s what the politicians are thinking about. Some of them, like those in Oregon, have come up with a totally cockamamie idea of taxing mileage driven, metered at the pump by some GPS-reading device, to avoid the pain of a tax on gas. Earlier we had some fun with this notion here.

Enter Senator Lugar, who takes off on Krauthammer’s idea of a net-zero tax. This would essentially be a transfer of money paid at the pump to reduce dollar for dollar the payroll tax that workers pay. The government is essentially a transfer agent.

Says Lugar:

A gasoline tax is transparent, easy to administer and targeted at the one sector that burns most of our oil. We know it would cut imports. When gasoline prices topped $4 a gallon last year, Americans chose to use less, leading to a major drop in gasoline consumption. The gains from accurately priced gasoline would grow as Americans demanded more fuel-efficient vehicles, chose non-petroleum alternatives to power them and found public transit options that work. Pricing gasoline to reflect its true cost to the nation would help spur a vast market in which oil alternatives such as advanced biofuels would become competitive and innovation would flourish.

krauthammerKrauthammer wrote a lengthy article explaining his proposal. It calls for a “simultaneous enactment of two measures: A $1 increase in the federal gasoline tax—together with an immediate $14 a week reduction of the FICA tax.”

The math is simple. The average American buys roughly 14 gallons of gasoline a week. The $1 gas tax takes $14 out of his pocket. The reduction in payroll tax puts it right back. The average driver comes out even, and the government makes nothing on the transaction. (There are, of course, more drivers than workers—203 million vs. 163 million. The 10 million unemployed would receive the extra $14 in their unemployment insurance checks. And the elderly who drive—there are 30 million licensed drivers over 65–would receive it with their Social Security payments.)

. . . Gasoline demand can be stubbornly inelastic, but only up to a point. In this last run-up, the point of free fall appeared to be around $4. If it turns out that at the current world price of $39 a barrel, a $1 tax does not discourage demand enough to keep the price down, we simply increase the tax. The beauty of the gas tax is that we—and not OPEC—do the adjusting. And that increase in price doesn’t go into the pocket of various foreign thugs and unfriendlies, but back into the pocket of the American consumer.

The benefit to the car industry is that

a gas tax would render these government-dictated regulations [like CAFE and the California standards] irrelevant and obsolete. If you want to shift to fuel-efficient cars, don’t mandate, don’t scold, don’t appeal to the better angels of our nature. Find the price point, reach it with a tax, and let the market do the rest.

Such a law would require exceptions for truckers and mass transit, buses, etc. Both Lugar and Krauthammer acknowledge this. For Republicans to be proposing a new, sensible, targeted tax is something I find truly remarkable. Can the proposal do what it says? It seems worth trying—particularly when the alternatives are all bad.

The Obama administration has taken a few big hits in recent days. They could repair the damage by getting into some serious talk with Mr. Lugar.

Would you pay a $1-per-gallon gas tax if it came back to you as a payroll tax cut?

—jgoods

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  1. Panayoti
    | #1

    The Blogger in Chief again finds another “clear way” to get the auto industry back on its feet. To do that he again proposes his repeated “gas tax” idea which entails, in essence, yet higher prices on gasoline, only under the guise of “it won’t cost you anything, because Uncle Sam will rebate the owner with increases in one’s Social Security check”. The Blogger in Chief is a rational man who certainly means well and desperately wants to help alleviate one of the country’s main problems. I, too, share his vision of helping abate this Mideast “addition” that is sure to kill us in the long run. Our approaches, however, are diametrically opposed.

    He says that the “math is simple” and tells us that we buy 14 gallons of gas a week and that each gallon should be taxed at $1. My math says that at today’s prices we would use 728 gallons per year which would cost us about $1350 per year. To that we would add $728 in his dreaded gas tax of $1/gal. That is $2074 per year, less the $728 that Uncle Sam rebates back to us which puts us back at $1350. He further adds, and this is where we part company, that if gas goes back up that we just “simply” increase the tax. That is just sheer lunacy!!

    Say that oil goes back up to $145-$150/barrel. We now would pay almost $8/gal. All this to discourage us from buying gasoline, quit driving our gas guzzling SUVs and to hopefully get off the Mideast “addiction”. That’s fine in theory but fails miserably in practice. This would positively devastate the lower income brackets as well as those in the lower to lower middle class brackets. Bimmer, MB, Porshe drivers would be only slightly annoyed. My dearest Blogger in Chief, what you fail to include in your thesis is the fact that no matter what the size of your pet gas tax is, it still does not mask the hit in the pocket book of real dollars paid to the Mideast pirates. The rebate from Uncle won’t mitigate the effect of the price increases levied by the pirates!! Allow me to further pontificate:

    Look, most people drive “X” miles per day out of sheer necessity. They drive “Y” miles for “pleasure”. I could be persuaded that your gas tax might have somewhat more merit for the “Y” miles, but it is the “X” that create the biggest headache. Look, people must go to work and engage in commerce. $4/gal gas is still $4 and that is just death. Adding $4 in taxes is worse than death. It is utter devastation. Imagine the poor bastard that thinks “it’s not that bad, Uncle Sam will rebate me my $4″.
    What about the initial $4 you paid?? You saw the consequences of that just a few months ago. Oh, by the way, when will Uncle send me my check?? In a week? a month? How do I eat in the meantime?? You were prudent enough to consider “exemptions” for certain occupations which would in itself create even more bureaucracy and enforcement nightmares much like our handicapped stickers do today as well as the other California fiascos you cited earlier. So a “solution” to our national nightmare continues.

    So what have we learned so far. Well, for one, $4/gal seems to be the “breaking” point for gas prices. Commerce stopped, unemployment increased, productivity increases disappeared, or at least could not be measured. The real culprit dearest Blogger in Chief, at least in my opinion, was the credit fiasco, exacerbated by the housing crisis, which caused the banks to fail and to stop lending thus decimating the auto credit companies who were financing most auto sales. Second, when gas prices declined to their present levels, sales of trucks and SUVs actually increased in December and January. Hmmm! Thirdly, auto companies domestic and foreign cannot “predict” what the consumer wants. Their product mix is as much a bet on consumer confidence than what the bean counters tell them that mix should be to maximize profit. Lastly, because this is becoming way too long again, is that neither government, nor the car companies can or should dictate what I should be driving. I’m never going to drive a sardine can no matter its mileage or the savings in my pocket book. I want utility, or speed, or g-forces, or comfort. I will pay for that, government policy or not. You cannot or will not dictate to me what I “should drive” even in the name of national security or energy independence so long as a free market exists.

    Now with the soon to come government takeover of the auto companies, you may end up with your wish as auto companies will have their profit motive subservient to energy policy whims of the government. So, my friend, you may inadvertently get your wish as we all sit in sardine cans or solar panels with wheels, or kites with wheels or golf carts with seats of batteries. I wonder what the government will do with Social Security, Medicare, the budget deficit, TARP 2, and the war in Iraq???

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