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June 29, 2007

Raise the Gas Tax – More Thoughts

In a previous post, I suggested raising the federal gas tax $.50/gallon every six month for the next three years in order to discourage consumption and reduce our dependence on imported oil –likely to reduce CO2 emissions considerably as well.  Reader and frequent commenter Bill posted a link to a Congressional Budget Office (CBO) study from 2002 on the relative effectiveness of setting carbon caps, raising fuel economy standards, and increasing the gas tax in lowering the use of gasoline.

The CBO’s mandate is to provide Congress with “Objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget…” and to provide estimates the budget process. This particular study was done at the behest of the Senate Committee on Environment and Public Works.

The CBO ranked raising the gas tax as the best alternative considering both likely effectiveness and side-effects such as unequal tax burden and the effect on safety; it ranked carbon caps as likely equal in effectiveness but much more of an unknown as far as other effects; its said that raising fuel efficiency standards (CAFE):

“…would not be a particularly cost-effective way to reduce gasoline consumption because it would rely on improving the fuel efficiency of passenger vehicles rather than encouraging the full range of gas-saving activities by producers and consumers (some of which might be less expensive). Further, by lowering the cost of operating a vehicle, higher CAFE standards could encourage people to drive more, which could increase congestion. In addition, under the standards' current design, automakers could use unproductive compliance methods that would impose costs on producers or consumers but not reduce gasoline consumption.”

So what did the Senate do do?  It voted to raise the CAFE standards.  It considered but didn’t pass carbon credits. It gave no serious consideration to raising the gas tax.  In fact it ran like a scared rabbit from the possibility of higher pump prices if taxes on oil companies were raised. Maybe they didn’t read the report.

Just to reinforce the point:  higher fuel-efficiency standards would result in more fuel efficient cars but work against other steps that people might take to reduce consumption. Smaller cars are worse for car-pooling.  More fuel efficient cars are LESS of an incentive to take mass transit. There’s good data that smaller cars are less safe.  Cars today are much more fuel efficient than those of a generation ago. Americans chose to take advantage of that efficiency by trading up to SUVs which, fact be known, only use as much gas as last generation’s sedans (a decision made pretty much during a time of cheap gas).  Raising gas prices, on the other hand, lets each family choose how and whether to save in its gas budget.

BTW, this isn’t fiddling around the edge that we’re talking about. In 2001 gasoline accounted for 43% of US oil use and 11% of world oil use. Our world share has probably dropped as newly affluent third-worlders take to the road but it’s still significant.

Because the US consumes so much of the world’s oil, a likely economic side effect of raising gas taxes according to the study is to reduce the profits to gas producing nations and companies not only by reducing volumes sold but also by keeping prices lower at each step of the process than they would have been had prices been higher. In other words, some of the tax increase is at the expense of the cartel. Sounds good to me.

An interesting point made by the report is that those who are retired and on a fixed income will automatically get some relief from higher pump prices since social security is inflation-adjusted. Another good use of the extra revenues the feds’d get.

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