A Gasoline Tax Proposal That Sounds Too Good to be True

Robert Frank explains the virtues of a gasoline tax offset by a reduction in payroll taxes:

A Way to Cut Fuel Consumption That Everyone Likes, Except the Politicians, by Robert H. Frank, Economics Scene, NY Times: Suppose a politician promised to reveal the details of a simple proposal that would ... produce hundreds of billions of dollars in savings for American consumers, significant reductions in traffic congestion, major improvements in urban air quality, large reductions in greenhouse gas emissions, and substantially reduced dependence on Middle East oil. The politician also promised that the plan would require no net cash outlays from American families...

[I]f something sounds too good to be true, it probably is. So this politician's announcement would almost surely be greeted skeptically. Yet a policy that would deliver precisely the outcomes described could be enacted by Congress tomorrow — namely, a $2-a-gallon tax on gasoline whose proceeds were refunded to American families in reduced payroll taxes. Proposals of this sort have been advanced frequently in recent years by both liberal and conservative economists. Invariably, however, pundits ... dismiss these proposals as "politically unthinkable."

But if higher gasoline taxes would make everyone better off, why are they unthinkable? Part of the answer is suggested by the fate of the first serious proposal to employ gasoline taxes to reduce America's dependence on Middle East oil. The year was 1979 ... To encourage conservation, President Jimmy Carter proposed a steep tax on gasoline, with the proceeds to be refunded in the form of lower payroll taxes.

Mr. Carter's opponents mounted a rhetorically brilliant attack..., arguing that because consumers would get back every cent they paid in gasoline taxes, they could, and would, buy just as much gasoline as before. Many found this argument compelling, and in the end, President Carter's proposal won just 35 votes in the House of Representatives.

The experience appears to have left an indelible imprint on political decision makers. To this day, many seem persuaded that tax-cum-rebate proposals do not make economic sense. But it is the argument advanced by Mr. Carter's critics that makes no sense. It betrays a fundamental misunderstanding of how such a program would alter people's opportunities and incentives. ...

A second barrier to the adoption of higher gasoline taxes has been the endless insistence by proponents of smaller government that all taxes are bad. ... But as even the most enthusiastic free-market economists concede, current gasoline prices are far too low, because they fail to reflect the environmental and foreign policy costs associated with gasoline consumption. ...

At today's price of about $2.50 a gallon, a $2-a-gallon tax would raise prices by about 80 percent ... Evidence suggests that an increase of that magnitude would reduce consumption by more than 15 percent in the short run and almost 60 percent in the long run. These savings would be just the beginning, because higher prices would also intensify the race to bring new fuel-efficient technologies to market.

The gasoline tax-cum-rebate proposal enjoys extremely broad support. Liberals favor it. Environmentalists favor it. The conservative Nobel laureate Gary S. Becker has endorsed it, as has the antitax crusader Grover Norquist. President Bush's former chief economist, N. Gregory Mankiw, has advanced it repeatedly. In the warmer weather they will have inherited from us a century from now, perspiring historians will struggle to explain why this proposal was once considered politically unthinkable.

Comments

[anne]

Oh well, let us all smash and bash anyone beyond those who pay payroll taxes especially the young and the old and well who knows. When there is time, I must think of a parody that would do justice to this idiocy, though the essay and proposal is its own parody.

[Robert]

I am appreciative of Anne's concerns regarding any increase in regressive taxes, yet I find America's conundrum of excessive expenditure relative to revenues, screaming for solutions almost as much as the extreme wastefulness and inefficiency by which we produce a unit of GDP relative to our OECD peers - particularly at a time when aggregate global demand vs. supply curves of hydrocarbons are inverting, and human impact upon climate change is approaching irrefutability.

Needless to say, action is required. But what to do? Raise revenues? Cut expenditures? If so, which ones? Some are generate positive externalities, some negative ones, whiles others are "externality-neutral".

Our OECD peers have NOT achieved their much more efficient creation of GDP per unit of energy by accident. It has been the result serious policy intervention using the mechanism of relative price to guide the market in the desired direction...particularly ones with with positive externalities.

For all the inherent beauty and wisdom of markets, they rather often fail miserably in respect of making more complex cost/benefit evaluations that involve the discounting monetary and non-monetary benefits - especially those that involve variable future prices. This is more apparaent the farther into the future one looks. Thus (for example) the unfettered market will choose (demand, for which supply will meet) the 3000 sq ft' of cheap less-than-energy-efficient housing at a price, than 2200 sq ft of much higher-quality more energy-efficient housing. The ROI on the sq. ft. vs. efficiency trade-off may not occur for a number of years under constant pricing assumptions, by may occur in very short order under variable energy pricing scenarios - the forward distribution which is NOT symmetrical given global hydrocarbon supply-demand curves.

I am a firm believer in the moral imperatives supporting progressive taxation, and I do NOT wish to see the lower economic strata of society taxed any more than absolutely necessary, but I firmly believe that there will be no behavioural change [which everyone knows is essential!] without changes in relative price, and since we know that there is a higher degree of determinism that relative price will be changing in the future, and that the adaptation lags are significant and severe, it is incumbent upon policymakers to lead the people in the direction of maximum societal benefit - not just in the immediate nano-second, but [especially] over the intermediate and longer-time frames where the people and market are typically incapable of making the more optimal decisions. THAT is what separates the childishness of policy skewed towards rewarding immediate gratification from the more difficult path of LEADING the people towards the more adult & mature decisions tending towards investment (yes, even if forced) and delayed gratification

[save_the_rustbelt]

"We won't be fooled again!"

The Who

By the way, this would be a tax increase on the retired. Are we going to cut their payroll taxes?

[Bruce Webb]

Let them put some numbers on the table. Will farmers and long-range truckers simply be exempt (or STRs retirees)? Do we avoid massive cost-shifting by not imposing this tax on diesal? And what would prevent every millionaire from buying a diesal BMW? What about those millions of people in Manhatten that don't own cars and use public transit to commute?

I don't have a problem with steep increases in the gas tax, but connecting it back to payroll tax cuts is lunacy. This seems to be a transparent atttempt to shift Social Security into the General Fund so it can be treated like every other discretionary social program. "Sorry grandma, people didn't buy enough gas last month. We HAD to cut your check, we just had no choice."

Payroll taxes are a defined revenue stream devoted to specific purposes. As is the gasoline excise tax. The Transportation Trust Fund has long been a political football, money flows through but the accumulated funds never seem to get expended on what they were ostensibly collected for. The very last thing we need is to get that commingled with the Social Security and Medicare Trust Funds.

[anne]

Robert, an intelligent response but we have expressly bred an energy intensive household and rather than punish households for what we have bred I suggest more spending on research and development of techniques for efficiency and conservation and emphasis on alternative energy use.

Also, before I did not think clearly, the idea of using the Social Security surplus to pay for a bizarre and immediately despised tax on energy use would mean the end of Social Security as an added nicety. Not only is the proposal politically comical, but it would be profoundly regressive for the effect on Social Security. I would be annoyed were the idea not so bizarre. These are the supposed American moralists...duh.

[anne]

There is a peculiar morality to these folks who have never learned to read philosophy beyond the imaginary Jeremy Bentham. Utilitarians are scary. Folks that were gleeful at the thought of war, find no relation in the price of oil and gas and the waste and destruction of the war, but they are all moralists. Leave Iraq. Focus on energy resources and general development in Africa, in Latin America....

[anne]

A touch of how bizarre this is comes immediately, when we are told how much we will all like this idea while only the politicians will for some reason or other deny us the joy of $5 gasoline. A doubly regressive tax for Grandma, coupled with slashing Social Security, and imagine, imagine, imagine the list of advocates. Grandma can hardly contain the liking, but oh the dread politicians who would protect her.

[Robert]

Technology, R&D etc are indeed good. But immediately, beginning to use less and more wisely is best, and incenting people via the mechanism of relative price to begin making energy-concious decisions will yield both immediate AND FUTURE benefits.

I certainly share your frustrations and sensibilities regarding the morality of this administration's and the specific proposal cited. By the way...did anyone else see any irony in Mr Bush's proposal to shift supply from Middle-Eastern sourced petroleum to homemade ethanol & biodiesels etc.? At least with the former, we can exert some influence upon supply and its reliability through financial investment and more astute foreign policy, whereas last time I checked, "the weather" was still more or less completely beyond our powers of influence & control...

[cynic]

Leave Iraq. Focus on energy resources and general development in Africa, in Latin America....

Is this an ontological argument or a utilitarian one? Or some other. I bet you cannot defend it without waxing utilitarian.

[paul]

I don't understand the level of emotion in some of the comments. Frank may have some details wrong (and of course the devil is in the details), but is the generic idea worth considering?

What about a $2/gallon tax on all petroleum based fuels, used for any purpose (transportation, heating, electrical generation) with the proceeds rebated to households. The amount rebated would not depend on either income or petroleum purchases, but would depend on the number of filers (single, married filing jointly, married filing separately) and the number of dependents. (How does Alaska pay its residents out of the state oil revenues?) To avoid a huge hit to the economy in the first year of the program, the money could be rebated quarterly, like estimated tax payments; and the tax could be phased in, perhaps increasing by $0.05/month over a period of 40 months.

This would raise the cost of oil, gasoline and diesel relative both to other fuels (coal, ethanol) and to other goods. The tax could be collected at the refinery, so retail gas stations would not be burdened with bookkeeping for an additional tax, and the collection would likely be less costly for the government.

In aggregate, it would be income neutral, and if set up along the lines suggested above, I think it would be progressive. And why shouldn't those who have chosen to live where there is good mass transit not benefit? Over time, this would likely strengthen political support for mass transit.

It would raise the price level, as goods that are produced with petroleum become more costly to produce, because the tax would be collected on this input, but this money too would be rebated back to tax payers, so...

[STS]

I haven't studied this proposal, but the general notion of substituting a gas tax for some portion of other regressive taxes seems like a reasonable idea.

If we had found a way to tax energy consumption to fund energy research years ago, we might have spent some of the many extra billions we are now donating to middle eastern royals and latin American dictators on new industries in the US.

[Yartrebo]

"Will farmers and long-range truckers simply be exempt [from the gasoline tax] (or STRs retirees)?"
- Bruce Webb

They'd better not. Trucking is the second least efficient mode of transport after air freight. Modern farming is very energy intensive and it could be reduced if there was an incentive.

The point of this tax is to reduce demand. If double priced gasoline puts truckers out of business (and benefits the railroads and canals), then good riddance.

[save_the_rustbelt]

"The point of this tax is to reduce demand. If double priced gasoline puts truckers out of business (and benefits the railroads and canals), then good riddance."

Beyond the fact that 98% of large trucks do not use gasoline, a majority of railraod freight reaches a final destination on a truck, ditto for canals.

[anne]

Try John Rawls or Kant, and avoid cynicism which accomplishes nothing :)

[Robert]

Yartrebo's point is valid if extreme: if the tax-adjusted relative price for hyrdrocarbons (for the sake of avoiding the pointless nit-picking on diesel v. gasoline) accomplishes the desired goal of rapidly shifting America to their more judicious use, and thus towards greater GDP per unit of energy input (or less energy input per unit of GDP) then "amen", inded. All progress causes dislocations.

[anne]

Fortunately, there is politics and the idea of a fierce gasoline or energy tax in the midsts of high energy prices is an impossible practicality. I seem to remember a governor of California thinking of letting the vehicle registration tax increase, and suddenly there was a new governor of California and tax increase never happened and California somehow, whoever can tell how, is somehow still there only with a new governor.

Now, I am going to make a point of driving more than I need to for a while just to laugh at, not with, all our new gas puritans :)

[slink]

"Oh well, let us all smash and bash anyone beyond those who pay payroll taxes especially the young and the old and well who knows. When there is time, I must think of a parody that would do justice to this idiocy, though the essay and proposal is its own parody"

annie annie get your gun...

i like the flash and fume
of this side of u

though alas we stare at each other from across the barracado...

[slink]

also i don't get the end of SSI as we know it bit

and mind you

i know why fdr wanted it to "look like"
an insurance plan

[save_the_rustbelt]

"All progress causes dislocations."

No doubt, but how are my cornflakes going to get to the grocery? Will all stores be built on rail sidings? A canal for every grocery?

I'm all for judicious use, but a little common sense please.

[anne]

Dear Slink :)

The proposal is to increase the price of gasoline by 50% and more with a tax, then to give the tax back using the payroll tax which funds Social Security and Medicare. Now I am all for efficiency, conservation and alternative energy, but here we are penalizing people who are gasoline dependent, failing to offer any benefit for those who receive Social Security and Medicare and penalizing them again by threatening and slashing the funding source for Social Security and Medicare.

[Robert]

The alternatives are numerous and smart people will figure out what works best. Surely it's not binary (either we use trucks or we don;t use trucks), but perhaps JIT inventory mgmt that favors less-than-truckload, multiple-hop delivery, would yield to more efficient full-truckload delivery. Maybe Fedex will be incented to use electric vehicles for regional delivery. Maybe mfgrs would stop with the incredibly wasteful and senseless multiple-layer plastic packaging. Let your imagination run wild...

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4778&exhibition=84&pass=public&size=default&lang=eng

Gray Catbird Eating Berry
New York City--Central Park, Harlem Meer.

"A canal for every grocery?" Now, there is cleverness. We will barge everywhere together, "toot toot" :)

[anne]

http://www.calvorn.com/gallery/photo.php?photo=4778&exhibition=84&pass=public&size=default&lang=eng

Gray Catbird Feeding on Crabapple
New York City--Central Park, Andrew Hasswell Green Bench.

Robert, I really agree with you in many ways :) We can be creative, and I do wish us to be.

[slink]

anne writes:

"here we are penalizing people who are gasoline dependent, failing to offer any benefit for those who receive Social Security and Medicare and penalizing them again by threatening and slashing the funding source for Social Security and Medicare"

sounds like the bush folks found ways to do all that without a gas tax

so maybe your right

we don't need no stinky gas taxes

[dryfly]

It isn't that big of a deal... sheesh. You guys would still get your twinkies & cereal and they wouldn't have to dig canals.

OTR trucks typically get about 6 mpg (I know - I drive a diesel Jetta & BS with them when fueling up - I get 50 mpg & it is pretty funny conversation)... Anyway at $2.50/gal that comes out to a little over 41 cents a mile. Add two more bucks and it now costs 75 cents a mile... huge increase right?

Well considering one of these big rigs can carry up to 80,000 lb of freight (total gross weight up to 120,000 lbs for the really big ones)... and a typical haul might be 1000 miles... the increased cost would be... (.75-.41)*1000 = $340... Divide it by 80,000 lbs and you get an increase in cost of ALMOST but not quite 2 pennies a pound. So to ship a 1 lb box of Honey Bunches a 1000 miles would increase the cost almost two pennies.

Well that is probably a pretty extreme case... most hauls are shorter (probably something like 500 miles) & loads lighter (50,000 lbs) but you get the idea. Still only adds pennies.

I think we can handle that people.

BTW here's a pretty fun site if you ever dreamed of becoming an OTR owner operator...

http://www.mountain-plains.org/pubs/html/mpc-03-152/pg8.php

Trucking looks like a good way to lose a lot of money if you don't know what you are doing.

[anne]

Dryfly

Nicely done :) Then, make the tax rationale simple and compelling in a less hysterical way than I am growing used to, and any tax trade off simple and ethical in turn, and I can be easily convinced. We have failed to push for fuel efficiency since about 1985, which is disgraceful. I am completely sympathetic.

[cm]

The German government actually did something like that, but the deal was to raise the gasoline (not diesel) tax and "refund" it by not raising existing payroll taxes. (At least for the time being.)

[cm]

The diesel exception being precisely to exempt big-business vehicles.

[Bruce Webb]

"namely, a $2-a-gallon tax on gasoline whose proceeds were refunded to American families in reduced payroll taxes"

There is no way of understanding this sentence other than cutting the payroll tax rate and so starving Social Security and Medicare of funds.

I suspect this is a backdoor method of concealing what privatizers are fully aware of - Social Security is in fact over-funded going forward. You can bet that this diversion via tax cut will be calculated to a nicety to put the Trust Fund back into actuarial deficit short and long term.

A fully funded Social Security Trust Fund would be a political disaster for the Republican Party. In fact I was counting on that. It would prove that they were lying all along about Solvency.

I have been wondering how they would handle the numbers in next Months Report. This may be a stalking horse.

[Bruce Webb]

My point about exempting farmers and truckers was that a $2 dollar a gallon tax aimed at consumers with the ability to adjust their behavior but which also socks every business and industry with a built in need to drive while exempting companies that don't is policy and economic lunacy. Are private companies also going to get rebates on the employer match? And would that in any way compensate for the fact that different private companies rely in very different ways on gasoline prices?

As outlined this plan socks it to red states and red voters while rewarding blue state urbanites that drive less if they drive at all. I walk to work, this puts dollars in my pockets. Unfortunately everything I eat, drink or wear travels over the roads.

The incentives are grossly out of line with demand. Some people gain 100% of the incentive without having to adjust their energy consumption at all, others get little to nothing of the incentive while taking it in the shorts due to inability to adjust their behavior (our trucker and farmer friends).

I am sorry, this only makes sense if someone wants to break down the barrier between the Social Security Trust Fund and the General Fund to the disadvantage of the former.

[dryfly]

I am sorry, this only makes sense if someone wants to break down the barrier between the Social Security Trust Fund and the General Fund to the disadvantage of the former.

But if you replaced a dedicated FICA with a dedicated gasoline and/or VAT tax you might actually have A LOT more funds going into the pot for safety net in general... maybe enough to fund SS & a universal healthcare system independent of employer (and I don't mean the dump-on-workers plan like Bush's HSA)....

The other thing it does is lower the burden for hiring... if both FICA & healthcare costs are lifted that results in a big incentive to hire here.

But you are right... the bill would have to be carefully crafted to make sure the funding is dedicated... and it will hurt Red States way more than Blue.

Never happen in this environment... but it could IF the bill was written right. Broad VATs are by far the best way to fund safety nets.

[Bruce Webb]

Dryfly, you might try reading Bush's budget. Per Bush we can't afford social spending and we can't not afford spending hundreds of billions more on defense. If we were talking economic policy in isolation that would be one thing. But we are not.

We are in the last stages of an ideological war over Social Security. We are this close to vindicating a social solution to retirement security, one totally funded by workers for workers. We are just this close to shoving a fully funded, indeed over funded Social Security system in the face of the Right that has insisted that only market based solutions work.

Certain elements of the Democratic Party heard Reagan say "Big Government is not the solution, Big Government is the problem" and had a choice. They could cry "Bullshit. Who do you think built Hoover Dam and the Golden Gate Bridge. And won World War II and built the Interstate Highway System" or cower and whimper "Thank you sir, can I have another".

Well too many people have bent over and grabbed their ankles. Well instead I suggest we stand up and unleash a full can of FDR whoopass on these liars.

We can and should have a debate over where to divert what looks to be a payroll tax stream that exceeds projected cost. But only once we get an explicit admission that Social Security is not broke. And then have an open debate about how to redirect a tax that is only imposed on payroll incomes under $90,000. And resist to the end any proposal that will send that money towards corporations or people whose income derives from investment.

But anyone who imagines that safety net programs would get a fair share of a tax system based on VAT is naive. As currently configured the Federal Gas Tax goes to a fund that pays for transportation, the Social Security Payroll Tax goes to replace payroll with disability or retirement, the Medicare Payroll Tax goes to pay for medical care for seniors. Criss-crossing those revenue streams only allows politicians to muddy the waters while diverting the flow.

Social Security is fine. Just leave it alone.

[dryfly]

But anyone who imagines that safety net programs would get a fair share of a tax system based on VAT is naive. As currently configured the Federal Gas Tax goes to a fund that pays for transportation, the Social Security Payroll Tax goes to replace payroll with disability or retirement, the Medicare Payroll Tax goes to pay for medical care for seniors. Criss-crossing those revenue streams only allows politicians to muddy the waters while diverting the flow.

Bruce it really depends on how the law was written... and the honesty & competence of those enforcing it. I agree the current 'leadership' lacks in both honesty & competence so I would be VERY reluctant to open any discussions with them on SS or any other safety net issues.

But there is no reason a good law couldn't be written that a competent & honest gov't could execute that would fund our safety net with a VAT instead of FICA like payroll taxes. It is demographicly neutral & increases with the growth of the economy as well or better than payroll does. And better yet the 'tax distortion' for a VAT would be to discourage consumption whereas the FICA distortion discourages domestic hiring... if the funding from the VAT was sufficiently large that they could roll a health care benefit in with SS then it removes TWO hurdles to hiring.

I don't disagree with your point about the current 'practical politics' of the issue... if SS issue gets opened up at all it dies on the table. That is the current reality. But my guess is sometime in the future after these market monkeys are gone into the history books... we'll revisit a VAT and that is exactly where we will use it - to sufficiently fund the safety net.

And because there is no 'crisis' we have time to evaluate options & wait for competent leadership.

[anne]

After a day, I am even more annoyed about the bizarre meanness and pretense to this essay. The essay is simply an attempt to rationalize the destruction of Social Security and Medicare, and mask endless mindless energy and foreign policy blunders at the expense of middle and low income households. Let the fool walk, I could care less for such pretend moralizing.

[ilsm]

Anne,

The only useful debate about oil is finding alternatives, funding them while evaluating all costs including disruptions.

Introducing tax policy is outside the margins of benefits and costs and goes toward muddleheaded blither unless the taxes are going to solve the supply (as opposed to messing with demand) side the oil problem.

The original author has no interest whatsoever in energy.

Where are the supply siders?

[Robert]

Yes, Anne, there are two problems: fiscal finance and excessive energy intensity. Cutting progressive revenues from income taxes and then crying about revenue shortfalls and looking to raise revenue through energy levies is both disingenuous, and mean-spirited. That said, I am confident that excepting really dire "London Blitz" style crisis, the language of 'relative price' is the only one that will impact and change America's behaviour.

But here's a thought: What if we turn Mr. Norquist's proposal on its head. First we raise the top marginal income tax rate by 7.50% on the $1 (over $100,000?), eliminate the Mortgage deduction on mortgages (excepting first ones < $500,000 (though we can eventually tackle this one too). Once levied, we can begin to look at appropriate energy tax/incentives independent of deficits, in respect of what their needed most to do: discourrage over-intensity, encourage conservation and the employment of renewables. Then, in the same spirit as their proposed fiscal kindness, we can offer Mr Norquist a regressive-style rebate on a portion of their higher fuel costs...

[anne]

ILSM

"The only useful debate about oil is finding alternatives, funding them while evaluating all costs including disruptions.

"Introducing tax policy is outside the margins of benefits and costs and goes toward muddleheaded blither unless the taxes are going to solve the supply (as opposed to messing with demand) side the oil problem."

Robert

"First we raise the top marginal income tax rate by 7.50% on the $1 (over $100,000?), eliminate the Mortgage deduction on mortgages (excepting first ones < $500,000 (though we can eventually tackle this one too). Once levied, we can begin to look at appropriate energy tax/incentives independent of deficits..."

[Robert]

Clarity in purpose is vital to making good policy. Sadly, spin and demagoguery and the preferred tools to selling it.

[anne]

The philosophical or ethical flaw to the essay is that we are to assume we are materially equal in this approach to having an energy pony, but as you have noted we are of course not, nor can problems caused for you be compensated at a wish by my gains. Your health does not allow happily for my illness. The pony must come in elsewhere. The individual is of no account to this utilitarian writer, who would do well to at least read the younger Mill to learn what a benign utilitarianism can be before preaching so generally to our welfare. Phooey :)

[greg]

Yes, gasoline (vehicle fuel of all types) taxes must be raised. I suggest 2-cents per month forever. ($2.40 increase after 10 years) But use the revenue to support the redesign and rebuilding of our country for living that requires less driving. A slow but steady increase in the gas tax would give the auto-makers a clear target to predict demand and time to develop more efficient vehicles. Consumers would quit buying vehicles based on the price of gasoline TODAY because they would know that it will be more expensive next month and the month after that.

The steady shift to more efficient vehicles and development of better public transportation with the tax revenue would avoid penalizing the poor and those on fixed incomes. Increasing the tax would reducing the demand on fuel. And with less demand, the price of the fuel would drop. So, the tax increase would at least partly be offset by lower energy costs. And we would still have the tax revenue to fund the shift away from our current and unneccesary wasteful transportation system.

The issue that seems to be overlooked in the political discussion, is that the biggest threat to life as we know it is to do nothing. The economy will not likely survive the inevitable repossessions of millions of 15 mpg SUVs and foreclosures on millions of McMansions in the suburbs if gasoline prices jump to $4,$5, or $10/gallon on their own due to shortages in production.

We need time to adjust to more efficient transportation. If significantly higher prices are thrust upon us - life will get really ugly.