Dec 01 2008

Lawmakers, Economists Eye Gas Taxes

Posted by: Jonathan Marshall

Now that election season is over, notes The New York Times' Green Inc. blog, politicians in Massachusetts, Oregon, Vermont and now New Hampshire are beginning to talk about the unthinkable: raising gas taxes to pay for infrastructure repairs and trim budget deficits. (The federal gas tax of 18.4 cents per gallon hasn't risen since 1993 and is much lower than in most other developed countries.)

Don't be surprised if more politicians begin joining them in the name of national security or combating global warming.

A new report by the Institute for 21st Century Energy, sponsored by the U.S. Chamber of Commerce and led by General James L. Jones (Rtd.), President-elect Barack Obama's designee as the new national security adviser, calls for "bold and comprehensive" action to reduce demand for energy, including imported oil:

The volatility of the gas and oil markets of 2008 is proof positive that a call to action is necessary and justified. With the recent sharp drop in oil prices, we should not be lulled into believing that this reflects a fundamental change in our energy fortunes. . . . Indeed, the fact that such boom and bust cycles have been all too common in energy markets over the past four decades is indicative of the lack of a national energy policy that keeps pace with the rapidly changing dynamics of energy markets and systems.

Most politicians still regard gas tax increases as the "third rail" of American politics--to be avoided at all costs. Back in the early 1990s, Senator John Kerry of Massachusetts made an off-hand comment in favor of raising federal gas taxes by 50 cents a gallon, only to face a Bush-Cheney '04 campaign ad a decade later blasting the idea as "wacky." Kerry had to backpeddle furiously. Learning from Kerry's misstep, Sen. John McCain in 2008 called for a summer-long suspension of the federal gas tax to help revive the economy.

Most economists across the political spectrum support higher gas taxes (sometimes paired with a reduction in other taxes). Maybe it has something to do with the fact that they enjoy academic tenure. President Bush's own chairman of the Council of Economic Advisers, Greg Mankiw, endorsed a 50-cent-per-gallon tax increase in a 1999 Fortune magazine article:

Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming--all without jeopardizing long-term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer.

Now the director of the University of California Energy Institute, economist Severin Borenstein, has issued an interesting new variant on the idea: a variable tax surcharge that would rise or fall inversely with oil prices in order to keep gas prices at the pump roughly constant:

Such a surcharge could stabilize gasoline prices at levels that a few months ago would have been celebrated by consumers and still significantly reduce California's budget deficit. It would also slow the return of gas-guzzling vehicles that will otherwise result if oil prices remain at current levels.

Even anti-tax politicians might support the plan if other sales or vehicle license taxes were cut equivalently. Why? Because higher gas prices would reduce traffic congestion and delays and, more important, reduce greenhouse gas emissions. Borenstein estimates that a tax surcharge that raised fuel-pump prices 50 cents a gallon to $3.00 would cut greenhouse emissions from transportation fuels by 9 percent in the long run, a substantial amount.

Of course, such a tax might be redundant if other policies, like cap-and-trade markets, raise the price of carbon fuels more generally. And gas taxes always raise difficult questions about equity, especially during a painful recession. But Borenstein's plan has the advantage of offering consumers more price stability, helping them make more thoughtful longterm plans about their choice of vehicles and driving habits.

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