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Just Say No to a Gasoline Tax Hike

Word on the political street is that a 15 cent increase in the federal gasoline tax may well be included in the final draft of a bill being prepared by Senators Lindsey Graham (R-SC), Joe Lieberman (I-CT), and John Kerry (D-MA) to address global warming.   Shell, British Petroleum, and ConocoPhillips – are said to support the tax because it’s a less costly intervention in the transportation fuel market (for them anyway) than alternative interventions that might otherwise find their way into this prospective legislation.  Shell et al. may be right about that, but be that as it may, this would still constitute lousy public policy.  A gasoline tax hike ought to be resisted.

Higher Taxes Will Not Alter Climate Under Anyone’s Math

The proposed gasoline tax increase will have no significant impact on greenhouse gas emissions.  That’s because the demand curve for gasoline is rather inelastic.  Hence, a 15 cent increase in gasoline prices – presuming that the entirety of the tax is passed on to consumers, which may not prove to be the case – would not discourage very much fuel consumption at all. 

While I don’t have any calculations at hand to translate the likely amount of reduced oil consumption into a percentage reduction in global greenhouse gas emissions (although that would be a fine project to undertake if this idea ever finds its way into the bill), the figure is certainly below 1 percent.  How much cooler would the planet be given that emissions decline over the next 50, 100, and 150 years?  That figure would certainly be too small to even measure.

Regardless, the uninternalized “negative externality” associated with the impact of gasoline consumption on the climate is likely to be rather small in monetary terms.  After a review of the pertinent economic literature by economist Ian Parrry, Mr. Parry concluded that a gallon of gasoline likely does about 5 cents worth of damage to the environment via its impact on the global climate, assuming that the conventional narrative about anthropogenic climate change is correct.  Accordingly, a 15 cent increase in the gasoline tax to address climate impacts would likely do more economic harm than good even if you believe the scientific arguments forwarded by the IPCC.

Let’s assume, however, that James Hanson is correct and that the IPCC narrative about future warming is too conservative.  If so, the correct response (that is, the policy response that addresses the issue at least cost to society) is a broad carbon tax (or a broad cap & trade program that in any case would amount to the same thing) applying to all sectors of the economy equally.  At present, however, we are being offered a politically-inspired assault on emissions that targets some sources to varying degrees but not others.  This is not only economically inefficient; it’s environmentally counterproductive because it invites wasteful rent seeking, emission leakages will inevitably arise, and total emissions will be far greater than they might otherwise have been.

Other Tax Arguments: Bogus Too

Many might agree on with the above climate argument but argue for a gasoline tax on other grounds.  While public policy intellectuals like to burnish their intellectual street cred by waving this particular Pigouvian banner, I’m not buying it.  I co-authored a study on this subject not too long ago, but for those who have not committed that text to memory, let’s quickly walk through the arguments:

It will slow down the inevitable decline of petroleum supply – Well, that’s true enough, but there is very little reason to think that scarcity is upon us now or in the foreseeable future.  Regardless, when oil becomes scarce, prices will adjust accordingly and the “right” amount of conservation will follow.  And if you think that “Big Oil” (or their international counterpart, OPEC) is jacking up prices for profit, then send them a thank you note – they’re already attending to this “inevitable decline of petroleum supply” for you … no extra tax necessary.

It will reduce consumption and, thus, the impact of future oil price shocks – Supply shocks are less of a macroeconomic problem than many people think.  Aggregate demand shocks are a much bigger problem and a small increase in domestic gasoline taxes won’t do much to address that given that those shocks are most likely to come from demand growth overseas.  Regardless, price volatility is not a market failure and those that fear it can hedge if they so desire.  There is no need for a government response.

It will promote efficient energy use – Nonsense.  There is little evidence that consumers are irrational when it comes to the trade-offs associated with automotive fuel economy or driving behavior.  If a consumer believes that a gallon of gasoline provides more value to him/her than the cost of that gallon of gasoline, then it is efficient to consume.  That simple statement holds unless there are large uninternalized externalities.  On the climate front, there may be externalities, but – as Parry points out – they are not large.

It will reduce pollution – Yes it will.  But are the uninternalized (conventional) environmental costs of that pollution (when monetarized) greater than, less than, or equal to the proposed tax?  Economists find themselves in all three corners of that calculation, so we can’t say for certain.  But if you think that the uninternalized environmental costs of gasoline consumption are a major problem, then the right answer isn’t a gasoline tax – it’s an emissions tax.  And believe it or not, the former would have far less of an impact on the problem than the latter and prove more economically inefficient to boot.

It will reduce dependence on foreign oil – Probably not.  Who says that reduced demand will mean reduced demand for foreign oil rather than reduced demand for (more costly to produce) domestic oil?  Regardless, imported oil presents no more problems than, say, imported computer chips.  Trade is a good thing.

It will reduce the flow of money to Islamic extremists and other foreign bad actors – To some (very small) extent, it will.  But is there any correlation between oil profits abroad and terrorist attacks or “bad acting” from suspect regimes?  No – none whatsoever.

It will reduce automobile accidents and congestion – Gasoline taxes are a very imperfect means to address accident costs because such taxes don’t vary with the density of the setting in which driving occurs or the extent to which a driver might be accident-prone.  Gasoline taxes are hopeless at addressing congestion because they do not correlate with use of congested roadways and, even when they do, they are not steep enough to deter use.  Witness high tax England where congestion in London was a hellish problem until congestion fees were instituted.  Again, better remedies – like congestion fees – are available to policy makers if they are serious about this problem.

It will help to pay for needed roads and bridges – To some extent, this is true.  But will they be the right roads and bridges?  The question arises because revenues from gasoline taxes are allocated based on political calculation more than true need or economic desirability (witnessed well-paved West Virginia versus chronically under-built Northern Virginia).  Moreover, too much of this money is spun off to bike paths, buses, and light rail – not the infrastructure being marshaled to justify the tax as a “user fee.”  If we want user fees for roads and bridges – and we should – then fine.  But let’s charge directly for use via tolls and keep the money where it is being spent. The gasoline tax, once again, is a poor second-best proposal.

6 comments

1 Rod Adams { 04.20.10 at 1:19 am }

Jerry – I agree that gasoline taxes will most likely have little effect on consumption. I also agree that large oil companies and international oil producers have already initiated action that has caused a much larger increase in the price of gas over the past year than would ever be considered by a tax increase. The figure I heard recently is an average price per gallon increase of more than 80 cents from 2009 to 2010.

However, I like the idea of gasoline taxes and suggest that there is a big reason why the oil companies liked them when they were first implemented and when they were last increased to fund the interstate highway system.

The tax is a huge revenue source for federal, state and local governments and, despite the occasional diversion to other uses, it has resulted in the construction of an amazing road network that makes interstate commerce far more efficient and interstate travel for common people much more pleasant and possible. I am old enough to have been on major automobile trips with my family before the Eisenhower Interstate Highway system was substantially compete. I have also put perhaps a million miles on various automobiles driving on the system over the past 34 years.

Tolls work okay for certain types of roads, especially when you have transponder systems that do not require stopping traffic to collect the tolls, but private industry would never bother to build many of the connections that we have today. In some cases, based on the infrastructure that has grown up AFTER the roads have been built by democratic decision making, private industry would love to take over the now highly traveled road to collect tolls.

Rent seekers often love to volunteer to take over successful public property and convert it to private gain – preferably at as low a cost to them as possible.

A gas tax increase would help to provide government the revenue that it needs in order to continue to build and maintain the infrastructure on which most private enterprise depends. I would FAR prefer for us – the taxpayers – to benefit from our logical decision making to consume gasoline than to allow all of the price inflexibility to accrue to the bad actors that reside in the corporate board rooms of oil suppliers. (I am not nearly as angry at terrorists as I am at people who walk away from the recessions that they had a hand in creating with $400 million retirement packages.)

2 Robert Bradley Jr. { 04.20.10 at 7:45 am }

Here is an update on where motor fuel taxes are as of April 2010 according to API: (http://www.api.org/statistics/fueltaxes/upload/April_2010_gasoline_and_diesel_summary_pages.pdf):

“The nationwide average tax on gasoline of 47.7 [cents per gallon] remained relatively unchanged since January 2010. A summary of federal and state excise taxes and other taxes collected on gasoline is shown below. The federal tax on gasoline is 18.4 cents per gallon. The average state gasoline excise tax remained at 18.5 cents per gallon from January. Other taxes (such as applicable sales taxes, gross receipts taxes, oil inspection fees, county and local taxes, underground storage tank fees and other miscellaneous environmental fees) are approximately 10.7 cents per gallon, up from 10.5 cents the previous quarter. Adding these taxes and fees to the state excise taxes results in a volume-weighted average state and local [or nonfederal] tax of 29.3 cents per gallon.”

3 Mark Walker { 04.20.10 at 12:36 pm }

The Province of British Columbia instituted a “carbon tax” a year ago, that was sold as being “revenue neutral” (which begs the question of why tax…).

To be revenue neutral, the gov’t created a series of rebates to low income earners, students and seniors.

The amount paid out in rebates has outstripped the tax revenue generated, so the tax is now “revenue-negative” (if you will).

Set to increase by $.025 per litre each July 1 for the next few years, and the rebates are scaled to help offset the “burden”, some residents in BC can look forward to increasing quarterly financial gifts from other BC residents for some years to come.

In the meantime, new bridges and roads are being financed with tolls, people continue to drive (and will drive more, and die more with more efficient cars), and BC will continue to suck oil from Alberta, because the gov’t believes itself too “green” to exploit our own resources.

Just look a little north to see the real effect of a “carbon tax” designed to change consumer behaviour in the name of the environment – that in fact is nothing more than a wealth transfer that achieves none of the stated goals for which the tax was designed.

Most notably, there has been no measurable change in BC’s temperature as a result of the tax – but El Nino almost killed the winter Olympics.

4 Robert Bradley Jr. { 04.20.10 at 12:41 pm }

I heard Rex Tillerson’s speech yesterday here in Houston at the World Affairs Council and am glad he is on the record against higher energy prices from government overregulation. That means NO LINKED FEE, right?

http://www.chron.com/disp/story.mpl/business/energy/6966210.html

5 Robert Bradley Jr. { 04.21.10 at 7:19 am }

Well, big oil interest or not, voter reaction seems to have scared John Kerry on a gasoline tax:

“Kerry tried to tamp down the gas tax talk and distinguished any transportation fuel plan from the unrelated, existing federal gasoline tax of 18.4 cents per gallon that helps pay for interstate highways and other roads.

“There is no gas tax, never was a gas tax, will not be a gas tax,” Kerry said. “The gas tax is 18.4 cents today, and it’ll be that when this bill is passed,” he added.

http://www.chron.com/disp/story.mpl/business/6967984.html

6 UNRR { 04.21.10 at 7:53 am }

This post has been linked for the HOT5 Daily 4/21/2010, at The Unreligious Right

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