The Case for Higher Gas Taxes

Taxes and Choice

Whenever I mention the idea of increasing gas taxes, some inevitably hear only half the message: A tax increase. They don’t want to know about any tradeoffs I propose, or if there might be a long-term benefit. They just know one thing: Tax increases are bad.

But I don’t want to increase taxes. I don’t like to pay taxes any more than anyone else does. I don’t feel like a patriot when I write a check to the IRS. No, what I am going to propose would give you more choice in the taxes you pay. I want to change the way you pay taxes in a way that will benefit future generations and reduce our dependence on foreign oil.

Don’t get me wrong. I understand the benefit of taxes. I recognize that a good bit of my tax dollars are well spent. I am happy to pay taxes that help improve our overall quality of life, or that secure a better future for our children. I just wish I had more control over the taxes I pay.

This attitude explains why I have always been a fan of lotteries. People can choose to buy a lottery ticket, and a portion of the proceeds goes into the tax coffers. But I can choose not to buy a lottery ticket. I feel the same about taxes on alcohol and cigarettes. I can choose not to drink or smoke, or I can drink and smoke a lot, and voluntarily pay more taxes.

Why We Need Higher Gasoline Taxes

The same logic holds for certain other consumption taxes, such as gasoline taxes. I can choose to use less, and the higher the price, the greater my incentive to make that choice. If the price is low, so is the incentive to conserve.

I think most can agree that in the U.S. a lot of gasoline usage is discretionary. We don’t treat our fossil fuel endowment as something that our children and grandchildren might need. We seem to be content to burn through it and keep our fingers crossed that there is a solution right around the corner for future generations. This is exactly the sort of “spend now, pay later” mentality that has gotten us into such a financial mess.

But what if you knew that there was solution just around the corner for our fossil fuel dependence? What if you knew that unless we scale back consumption, your children and grandchildren will have to make far greater sacrifices? I think I speak for most parents when I say that I am willing to voluntarily sacrifice if it enhances the odds that my kids will have a brighter future.

This forms the basis of my support for higher gasoline taxes. In my opinion, a small sacrifice today will stretch our fossil fuel endowment and buy more time for sustainable alternatives to emerge. The advantages of having a higher gasoline tax, or more generally a fossil fuel tax, would be many in my opinion. They include:

• It would lead to conservation, which would help preserve our remaining fossil fuel endowment.

• It would encourage mass transit (people flocked to mass transit this year as prices climbed).

• It would make alternative energy candidates more competitive with fossil fuels, without picking specific technology winners.

• It would enable people to do a better job of planning ahead, as opposed to the constant expectation that low gas prices are right around the corner.

• It should encourage more efficient city planning, and rein in some of the suburban sprawl.

• It would make the price of fossil fuels more reflective of the negative externalities that are not currently priced in (air pollution, military expenditures, etc.).

• It would penalize alternative energy sources with low energy returns, and reward those processes that minimize fossil fuel inputs.

Political Palatability

But I don’t want to just give the government more money in the form of higher taxes, and therein lies the catch with my proposal.

The most often cited disadvantage is that higher gas taxes are regressive; that they would hurt lower-income workers the most. That’s a fair criticism, but we can address it. Let’s consider some rough numbers for illustration (assuming only a gasoline tax). The average family consumes almost 2,000 gallons of gasoline a year (per the EIA, gasoline consumption in 2007 was 142 billion gallons for a U.S. population of 300 million people). If we phased in a federal gasoline tax increase of $0.20/gallon this year, $0.30/gallon next year, and then $0.50/gallon in each of the three following years, the total tax increase would be $2.00/gallon. Such an increase would still put gasoline prices at less than they are in Europe, but should encourage serious conservation measures, while at the same time allowing people time to plan for the tax increase.

But what about the additional tax burden of $4,000 on the average family? In order to offset the burden of these higher taxes, I would propose that as a part of the package we lower tax rates, or offer a tax credit equivalent to the increased tax burden for the average American. This is equivalent to $400 in the first year of the tax, and $4,000 by the time the last increase is phased in. Families that use less gasoline than the average should actually see their overall tax burden decrease. Those who consume more than 2,000 gallons per year will see an overall increase in their tax burden – and will therefore have a stronger incentive to reduce their fuel consumption. For those whose fuel usage is for farm or business use, the fuel taxes could be deducted against business income.

The price spikes over the past year have highlighted just how vulnerable our fossil fuel dependence has made us. We are dependent on certain regimes that are hostile to our interests. It is only a matter of time before energy prices go back up, and vast amounts of money start once again flowing out of our economy and toward those hostile regimes.

If we are to start working toward a solution to our fossil fuel dependence, we must first accept personal responsibility for our own energy consumption. We need to shed the belief that we are going to run this country on ethanol or biodiesel. It simply can’t be done at our current levels of energy usage. In the U.S. we currently import over 10 million barrels of crude oil a day (and finished products over and above that). That is over 12 barrels of oil imported each year for every man, woman, and child in this country. We need to – as a first step – bring our energy consumption more in line with that of the EU. By doing this, we have a realistic chance of (temporarily) reaching energy independence.

The intent is not to increase net tax revenues, but rather to discourage excessive consumption. This is a practical measure to address our fossil fuel dependence. We saw the impact high prices have had over the past year. People started to embrace mass transit, conservation, and higher fuel efficiency. Many had no choice, as higher prices devastated personal budgets. Without a doubt, people responded to higher fuel prices.

We need to have better forward planning around fuel prices, or the next round of price spikes will see more failures in the airline and auto industry, and will once again play havoc with personal budgets. But as long as politicians keep promising low gas prices, some people will avoid making choices to lower their energy consumption. The surest way to encourage people to move toward lower energy consumption is to let them know – with certainty – that higher prices are on the way.

I close by reiterating that I am not proposing a net increase in taxes, nor am I proposing bigger government. But when I pay taxes, I would rather be taxed on my consumption – which I can choose to reduce. Because of the need to reduce our fossil fuel dependence and save some of our fossil fuel supplies for future generations, this sure seems like a no-brainer to me. Yet I am not the first to propose such a scheme, which leads me to believe that our political leaders lack the collective courage to tackle this controversial issue.

Here’s hoping with a new administration, the response is a sincere “Yes we can!”

34 thoughts on “The Case for Higher Gas Taxes”

  1. The biggest problem I have with government enforced conservation is that it won’t work. Other than that it is a fine idea. Why won’t it work? Because Europe and now the United States can conserve all they want but ultimately that is not going to change the overall consumption of oil. As we curtail our consumption, India, China and other up and coming countries are simply waiting in the wings to suck up that excess supply. The more we conserve, the cheaper the price of oil will be and the easier it will be for them to ramp up there consumption of oil.

    The world is going to continue sucking oil out of the ground as long as it is profitable to do so. The only way to stop it is to come up with alternatives that are cheaper. Making oil artificially cheaper for India and China stifles innovation and development of alterntives in those countries while crippling our economy.

  2. Doug, by imposing a fuel tax we will, in effect, make alternatives cheaper. And while it may not lower world oil consumption as the Chinese and Indians begin to demand more, it will lower the demand curve versus where it otherwise might have been.

    Robert, I only hope our political leaders have the courage to do it. IMO the GOP needs to show some leadership here, rather than lie in wait to use the “tax issues” to beat up the Dems.

  3. I’m all for a big increase in the gas tax, but provisions have to be made for farmers and essential others whose living requires them to use more gas than the average person. Perhaps rebate 75% of the new revenue to normal folks, use 20% to pay back farmers et al, and use the remaining 5% to reinvigorate our rail system.

  4. Do you have any thoughts on the rural/urban problem? A lot of the poorest Americans live in rural areas, where transportation costs are significantly higher.

  5. @Doug: China and India are quite a bit smarter than most people think. If they see a way to meet energy demand without subjecting themselves to the financial, political, and social costs of fossil-based energy production, they will adopt it. But the *development* of such alternatives is going to happen (if at all) in Europe and the USA. The US is doing some impressive research in that direction and some impressive products are on the market but they need to be scaled up fast. Robert’s proposed gas tax will do a lot to speed up that process. We’ve shown the world how to waste energy; now it’s time to show them how to save energy and grow anyway.

    Regarding those who must use lots of gas, e.g. farmers. I’d like to remind everyone that farmers are THE biggest customer group for solar power in Germany. They have BIG roofs and they know a thing or two about making every square meter available to them produce cash. I’m sure the gas tax could be structured in a way to help farmers install solar power and sell it to local utility at a profit, so that they’re financially better off after the gas tax than before. This will require setting minimum prices per delivered kilowatt hour…prices that seem insane to the casual observer. But the “outrageous” premiums bring you a number of benefits including:
    – lower net burden (even net benefit) for the farmers, and thereby increased likelihood of passing the gas tax in the first place
    – rapid scale-up of photovoltaic production, accelerating the decreasing production cost of PV (so the price floor can decrease for each year’s “crop” of new PV system owners)
    – contribution to energy independence/security
    – stabilistion of the grid (more power produced close to load centers when the day’s heat drives load levels up = less power crammed through long distance transmission networks = less wear and tear on the network, fewer blackouts and lower maintenance costs)

    The real economic value (and it is real) of these benefits should be measured and seriously considered before judging feed-in tariff levels.

  6. RR-
    I am in agreement, except I favor even sterner medicine: 50 cents a gallon increases, for eight straight years, balanced by middle income tax cuts, maybe even abolition of corporate income tax.
    Note to John Farrell: Americans have been subsidizing the rural lifestyle for generations, not least through subsidized roadways. Subsidies create distortions, which then have to be sustained through more subsidies. I am sorry for bona fide poor people who have moved into the hinterlands. But a national energy policy cannot be made based on the exceptions. It has to made based on what happens to the whole.
    If we do not start taxing gasoline seriously, we will continue to shovel hundreds of billions of dollars every year out of our economy into the economies of oil states. We will pollute more. I see so little upside to cheap gasoline (I could even argue “subsidized gasoline,” as military costs and pollution costs are not factored into the price).
    I say tax away, tax to the moon, tax, tax, tax. It is a tax people can reduce by driving higher mpg cars, or other methods.

  7. A gasoline tax is certainly one way to encourage conservation, however without earmarking the additional tax income from gasoline it will most likely not go to where we all might want. Why not make the gasoline tax a regional, state by state, issue. This would compensate those states that are in fact producing the revenue. Earmark the gasoline tax for road and infrastructure improvements. After all this is where the gasoline is going to use over.

    Doug is correct. No matter if the US conserves every barrel of oil produced in the world will be consumed by someone, even if its not the US. The big benefit is the faster we make alternatives viable the faster we can see the economy of scale kick in and see those fuels get lower in cost to produce.

    Farmers are in control of their future when it comes to energy costs. They have alternatives for energy that can lower their net costs by going to more efficient energy crops than corn. If a fuel scientist were dropped on this earth from outer space and a told without using any fossil fuel, make a fuel product. He would use a high energy grass and eat the corn.

  8. I have thought a bit about this issue from a Canadian perspective.

    The government could put a floor on fuel prices: pocketing any difference between the market price and the sale price as revenues. Those could then be invested in a fund that will pay out annual dividends to future generations. This would be akin to the oil-funded pension system that has been established in Norway. In this way, members of future generations will at least profit in some proportion of this generation’s fossil fuel wealth. It would also simplify planning for all those who use fuels, since they would be certain of paying at least a pre-set amount at any point in the future.

    This isn’t an approach that the world as a whole could take, or even any major players in it. If the government set a floor price of $2 for a litre of gasoline, gas suppliers could just expand their prices to that point and eliminate any payments to government. Since Canada isn’t large enough to substantially affect the international price of oil, however, there may be scope to tax the difference between the floor price and the international price for an equivalent amount of crude oil / coal / etc.

    No doubt, this system would cause some economic and equity-related problems I haven’t anticipated. That being said, it is perhaps an example of the general kind of approach that governments should be considering.

  9. @ garsky

    Re: farmers

    I know that in Michigan, farmers don’t pay gas taxes. The fuel tax is only levied on vehicles driven on roads, specifically exempting farm machinery.

    So farmers are already protected.

    Now if you mean that farmers shouldn’t have to pay more for gas for their personal vehicles because they just have to drive more because they want to live in the country but drive a lot, well, that’s the problem. We all need to pay more for gas, including farmers. By exempting farm fuel use from the fuel tax, we’ve protected their livelihood and given them first call on the resource, which is fine and dandy if they’re growing food or fiber for people. But lots of those farmers are only farming subsidies for biofuels, which is a colossal waste of land and resources. THAT shouldn’t be encouraged at all.

  10. Interesting idea, but as long as politicians can be lobbied by powerful oil companies and related Special Interest Groups, the taxes will remain at a level that will allow oil and thus gas for fuel to be a virtual “monopoly” over alternative fuels. Thus, the other fuels will remain “alternative”.

    Perhaps taxes aren’t the answer, considering no one likes paying them anyway. What about increased government subsidies or tax breaks for other energy? Perhaps allow consumers who are smart about energy to join a lower tax bracket? Or, perhaps make oil companies fund other energy options?

  11. Robert. You said most people dont see a replacement for petroleum right around the corner. Well T. Boone Pickens has been spending an awful amount of money and time in Washington,D.C. and TV telling anyone who will listen that natural gas can do just that. He is backing off a bit on his plans lately. The last time I heard him when asked by a reporter on C-span he said that cars could run on batteries but there aint no way eighteen wheelers could. Someone should tell Mr. Boone their working on it. Here in the State of Connecticut we’ve had one of the highest gas tax in the country. As a matter of fact they cut it a bit during the high gas prices and now the’re sorry. With the economy in the dumps they dont dare raise it again. J.C. Sr.

  12. It sounds so tempting. Other people are "wasting" gasoline. We can fix them — I mean fix the problem. Good thing that we are so much brighter than the rest, and we know what they really need — much better than they know themselves.

    Seriously, would you people just listen to yourselves for a moment? Stalin would be right at home in your company.

    To be practical for a moment, remember the Iron Rule for all you would-be managers of the economy — the Law of Unintended Consequences. Something has escaped the notice of all you "best & brightest". We just don't know what, yet.

    Here is one suggestion. Consider the ruler of one of Benny's Thug State oil exporters. It pisses him off royally that those bastard politicians in Europe are making a stable $200/Bbl from taxes on his oil. Now US politicians want to get in on the act.

    In the meantime, the Thug gets stuck with all the costs of production, a wildly fluctuating oil price, and a low share of the economic rent. And those damn western governments claim they are squeezing all that tax money out of their own people in order to reduce the size of the market for the Thug's oil.

    Push the Thugs too hard, and they will do something. Lots of possibilities, once they really get their backs up. Be careful what you tax bugs ask for.

  13. Robert,
    What would you estimate the probability of new gas taxes being sent back to the taxpayers in the form of reduced taxes elsewhere vs. the money being spent where it will benefit the politician the most?
    I think a number between 0 and 1 percent would be a reasonable estimate, perhaps even generous.

  14. I don’t favor a gas tax for conservation reasons. The US does consume 25% of the world’s oil,but that percentage wouldn’t change a whole lot with a $2 tax imo. If we tax fossil fuels,we make alternatives more competitive. Wind and solar are only attractive with tax breaks and subsidies. Why not go the other way,and tax coal and NG instead?

  15. What would you estimate the probability of new gas taxes being sent back to the taxpayers in the form of reduced taxes elsewhere vs. the money being spent where it will benefit the politician the most?

    I would only make the deal as a combination. I wouldn’t raise taxes, and then promise a tax cut elsewhere. That would have to be part of the package.


  16. Why not go the other way,and tax coal and NG instead?

    I would tax all fossil fuels. By default, this would also tax low energy return “renewable” energy.


  17. Seriously, would you people just listen to yourselves for a moment? Stalin would be right at home in your company.

    Funny story. Last night someone sent me a link to the story about China raising gas taxes. My response: Very significant that China is making this move. I would like to point this out on my blog, but of course it would just prove for some that I really am a Communist. 🙂 I also pointed out that while Stalin and I have the same birthday, I am no Communist.

    But listen to yourself. Tax bugs? I am not proposing to increase taxes. I am proposing to be taxed differently; on something I can choose to use less of rather than on my income. I would rather have an incentive to conserve than a disincentive to earn more money. You wouldn’t?

    Other people are “wasting” gasoline. We can fix them — I mean fix the problem. Good thing that we are so much brighter than the rest, and we know what they really need — much better than they know themselves.

    Yeah, in fact we should loosen up the reigns even more. I think people have earned it, what with all of the mortgage defaults and record debt. I mean, people have shown themselves to be responsible enough, right?


  18. Kinu:
    Let me defend myself.
    1. I want a gasoline tax, but offset by lower income and corporate taxes. If I could be a tax czar, I would eliminate federal income taxes on the middle class (doing away with who knows how much paperwork and enforcement, and snooping into people’s lives). The corporate income tax hardly raises any money either, and it might make sense to just eliminate it. The shareholders and others could not justify outlandish salaries etc, by saying “Well, it is tax deductible.”
    2. On oil thug states: We have to determine what is best tax and energy policy for us, and should not cower in front of anybody else. Besides, who else are they going to sell the oil to? Oil is a fungible commodity anyway. They can cut back, but they will anyway. It is in their national interest to exact the highest price possible, at all times, by controlling production and manipulating prices on NYMEX or other exchanges. We have to follow our national interest, and expect them to follow theirs.
    As a last comment, I want to emphasize I mean no disrespect for the people of any nation. Only the leadership. People are more or less good wherever you go.

  19. I mean, people have shown themselves to be responsible enough, right?

    Robert exposes a fundamental flaw of libertarian economics – the assumption that individuals make rational long-view economic choices. Take a look at the average 401k balance if you have any illusion about this.

  20. OK, let's talk as adults. We have had 60 years since WWII of self-described smart people micromanaging the economy — and the results speak for themselves. High gasoline taxes would be more of the same.

    Taxes make an activity economically LESS efficient. In a world of increasing competition, it would be dumb to strap on some extra weights before trying to keep up in a marathon with China, Korea, Brazil. Politicians have failed us dismally so far. Why would any thinking person expect that higher gasoline taxes would end up in anything other than failure?

    If we really want to accomplish something, why not concentrate on the real issue. We need breakthrough technologies which will provide better, cheaper, more convenient sources of energy. Instead of taxing fossil fuels and hoping for an indirect effect, why not go for what we want directly?

    Nixon went to China. Obama could go to the major Democrat power brokers — extreme environmentalists, ever-impeding lawyers, and middle class bureaucrats — and read them the Riot Act. Rip up thousands of pages of tax regulations and put in something very simple — immediate write-off of all expenditures on energy supply R&D. Pay for it by cutting off expenditures on Global Warming research. Eliminate most regulations that discourage innovation. And let a thousand flowers bloom.

    If Obama does not do that — and soon — then he will be a total failure.

    To deal with volatility of oil price, rip up some more tax regulations and excessive "environmental" regulations. Encourage the stockpiling in the US (& elsewhere in the west) of very large volumes of oil as a market stabilization device. Charter investor-owned companies (could be state-owned in Marxist places like California) to buy oil when it is less than an announced price and sell it when it gets above that level. Since they are buying low & selling high, they should make a profit in the long term. The level at which they stabilize the oil price could be encouraged to climb at a steady rate, providing an additional incentive for R&D on real energy supply alternatives.

    Of course, there also needs to be an end to political selection of uncompetitive energy sources for special favorable treatment.

    This would be real change. And real encouragement of the only long-term solution — new energy sources. We can only hope for such change.

  21. "Rip up thousands of pages of tax regulations and put in something very simple — immediate write-off of all expenditures on energy supply R&D."

    Companies only pay taxes on profits Kinuach. They can already write off expenditures immediately,but why would they want to do that if there are no profits to offset? If LS9 spends 50M on R&D,they'll want to save those write-offs for when they start to make money. Can they make money competing with .99 gas,or will they set up shop in Europe or China instead? Maybe we should provide a competitive environment to lure alternative energy companies to the US. No better way to do that than with high prices on fossil fuels.

  22. Kinuachdrach does miss one important point: people (lobbyists and government) have in the past and are at the moment deciding what people “ought” to be doing and pushing them towards that. The building of the interstate highways back in the 40s and 50s was a decision about what would be appropriate from the government and people have responded to them. The decision to grant special treatment to employer medical plans (40s again?) was a decision that had an effect on the America at large. Politicians predicating judicial appointments on the view on Roe vs Wade is a constant battle to affect America. It’s not a new thing. You can absolutely argue that people should think about the consequences of their actions to the best of their abilities is very true, but to pretend that if one group of people don’t take a stance you consider stalinist doesn’t change the fact that others are already acting in a “stalinist” way and that there are even more working to be in a position to act “stalinistically” on the issues important to them.

  23. Sheesh anyone who knows me would consider me more conservative than Ghengis Khan and I’m in favor of a gas tax.

    Fuel taxes are proven to work (in Europe for 30 years). It’s a market-based mechanism to send the right signals to consumers. Unlike CAFE standards that force car makers to build cars people don’t want.

    The way I look at it is, at some point we will end up in the inelastic portion of the supply and demand curves again (like we did in 2008). When this happens, prices will rise too rapidly for people to easily adjust. And the higher prices will translate into more money sent to foreign suppliers. This is inevitable, the only question is when. We can either have it happen suddenly and without much warning, or we can force it to happen gradually on our own timetable. As a bonus, the higher prices caused won’t translate to money sent to foreign suppliers – they’ll translate to higher revenue for our government, which needs the cash.

  24. Hi Bo,

    I have been asked about Chu a lot, and I have been meaning to post something. It would have been more timely a couple of days ago, but I still plan to write something.

    Bottom line is that I think he is a solid pick. I like to see scientists/engineers in those kinds of roles, and I think he definitely understands a bit about the energy challenges we face.

    Cheers, Robert

  25. “…reign [sic] in some of the suburban sprawl”. Aagh!

    P.M., while I sometimes get careless, I am a stickler for using words properly. I asked another engineer who works in the office how he would spell it in that context, and he said “reign.”

    However, we looked and found two things. First, the proper usage is “rein”, but people so often use “reign” in that context that it is widely accepted. Nevertheless, I shall change it, and honestly appreciate the lesson.

    Cheers, Robert

  26. If the goal is to sequester carbon, we can just make lots of plastic. The stuff lasts forever. It might be eroded to little plastic bead particles that sufficates filter feeders, but it is still plastic.

    Not to belittle what you do. It’s great to save the tropical reignforests.

    Just about every house in California is under termite attack. The day after the tent comes down, the little beasties move back in. If you can make termite proof 2x4s, that’s a lot of methyl bromide that doesn’t have to be vented to the atmosphere for termite control.

  27. If the goal is to sequester carbon, we can just make lots of plastic. The stuff lasts forever.

    We are in the wrong thread, but plastics don’t sequester carbon since they were made out of oil in the first place. The net is zero. The carbon in our wood was sucked out of the air.

    Our wood is highly resistant to termites.

    Cheers, RR

  28. Admittedly, I use a lot less gas than the 2000 gal/year average but $4/gallon gas didn’t change my driving levels at all. I would need to pay $8/gal before I noticed.

    Otherwise, I am generally in agreement. I would increase the taxes more than you and redistribute in a different way – perhaps income tax credits for 50% of the new tax and use the other 50% to help the people who can come up with a good argument as to why they need it – or to create other incentives to using less fuel – more public transit – or subsidies to purchase more fuel efficient cars – making public transit more fuel efficient.

  29. A better solution might be to tax imported oil at the terminal. This would effectively raise the price of products without hurting domestic producers. We currently are moving away from energy independence due to low prices on domestic production. Are you aware that the well head price of oil in Wyoming is under $20 per barrel. North Dakota oil is selling for $25. Thousands of oil wells in the US are going to be plugged at these prices. Domestic drilling is already crashing.

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