Raise the Gas Tax

The attached editorial, which appeared today in the Wall Street Journal, brought up a subject that I have meant to discuss. For many years now, I have been in favor of significantly higher fuel taxes in the United States. I am glad that Mr. Mankiw has opined in favor of this general approach. My own justification of this policy focuses on energy independence (in the medium-term) and environmental benefit (in the longer term).

However, I would make the following comments on his editorial:

1. He is too timid as to the rate of rise and the desired ultimate fuel tax rate to be targeted. One dollar per gallon more taxes, to be attained in $ 0.10 increments over ten years is simply not meaningful enough to structurally change consumer behavior. Although I have not studied the matter, this is an policy area which is susceptible to serious analytical work. My own guess would be that a total increase of $ 3 per gallon is more like it. This could be approached by increases of $ 0.25 per gallon per year for the first four years, followed by increases of $ 0.50 per gallon per year thereafter until the desired level of taxation is attained.
2. Since the United States is large and housing is increasingly far from work, public transport is spotty at best, and the poor would have to retain the current fuel in-efficient fleet the longest, such an aggressive increase in fuel taxes would hit some people extremely hard. This could be mitigated by something like the refundable earned income tax credit for those disproportionately adversely impacted.
3. In order to have the best effect, these taxes would have to be permanent. Consumer behavior will most likely change the fastest if consumers were convinced that the increased taxes are permanent. Likewise, automotive industry, fuel supply industry, alternative propulsion, and infrastructure investment will happen faster and more smoothly if decision-makers are convinced of a real shift in market desires. Let's not opt for an "on-again, off-again" set of taxes (like the R&D tax credit).

Is this politically feasible? Not in today's political climate, unfortunately. It will take more positive leadership and less partisan doctrine than either the Administration or the Congress seem able to muster.

Raise the Gas Tax

By N. GREGORY MANKIW
October 20, 2006; Page A12

With the midterm election around the corner, here's a wacky idea you won't often hear from our elected leaders: We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade. Campaign consultants aren't fond of this kind of proposal, but policy wonks keep pushing for it. Here's why:

The environment. The burning of gasoline emits several pollutants. These include carbon dioxide, a cause of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns.

Road congestion. Every time I am stuck in traffic, I wish my fellow motorists would drive less, perhaps by living closer to where they work or by taking public transport. A higher gas tax would give all of us the incentive to do just that, reducing congestion on streets and highways.

Regulatory relief. Congress has tried to reduce energy dependence with corporate average fuel economy standards. These CAFE rules are heavy-handed government regulations replete with unintended consequences: They are partly responsible for the growth of SUVs, because light trucks have laxer standards than cars. In addition, by making the car fleet more fuel-efficient, the regulations encourage people to drive more, offsetting some of the conservation benefits and exacerbating road congestion. A higher gas tax would accomplish everything CAFE standards do, but without the adverse side effects.

The budget. Everyone who has studied the numbers knows that the federal budget is on an unsustainable path. When baby-boomers retire and become eligible for Social Security and Medicare, either benefits for the elderly will have to be cut or taxes raised. The most likely political compromise will include some of each. A $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue and make a dent in the looming fiscal gap.

Tax incidence. A basic principle of tax analysis -- taught in most freshman economics courses -- is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.

Economic growth. Public finance experts have long preached that consumption taxes are better than income taxes for long-run economic growth, because income taxes discourage saving and investment. Gas is a component of consumption. An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth. It would also encourage firms to devote more R&D spending to the search for gasoline substitutes.

National security. Alan Greenspan called for higher gas taxes recently. "It's a national security issue," he said. It is hard to judge how much high oil consumption drives U.S. involvement in Middle Eastern politics. But Mr. Greenspan may well be right that the gas tax is an economic policy with positive spillovers to foreign affairs.

Is it conceivable that the policy wonks will ever win the battle with the campaign consultants? I think it is. Even after a $1 hike, the U.S. gas tax would still be less than half the level in, say, Great Britain, which last I checked is still a democracy. But don't expect those vying for office to come around until the American people recognize that while higher gas taxes are unattractive, the alternatives are even worse.

Mr. Mankiw, a professor at Harvard, was chairman of the Council of Economic Advisers from 2003 to 2005.