What? A Sensible New Gas Tax Proposal?
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.
I 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.
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.
Krauthammer 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?