The Gas Tax and the Un-Tax

05/1/2008 by Charles Komanoff

Guest Post by James Handley

Will you sell your vote for $25? Presidential candidates John McCain and Hillary Clinton are betting you will. They’re campaigning for a “holiday” on federal gasoline taxes for the summer months.

Of the three presidential contenders, only Barack Obama has demurred. Obama said last week:

[T]he federal gas tax is about 5 percent of your gas bill. If it lasts for three months, you’re going to save about $25 or $30, or a half a tank of gas.

Obama insists that the only permanent solution to rising gasoline and diesel fuel prices is to reduce consumption and increase use of alternative fuels.

Martinez_refinery_ablaze.jpgHaven’t we been down this road before? Yes, a dozen years ago. The New York Times excoriated the same “gas tax holiday” in May 1996:

Fill ‘er up, America, this is the Memorial Day holiday and the start of the “summer driving season.” We are a road-running, gas-guzzling people and Bob Dole, Newt Gingrich and Bill Clinton all say our Federal tax should be lowered 4.3 cents a gallon. But the tax relief, if it ever comes, will be trivial — and will have a negative impact on public policy. It is, in short, something of a political fraud.

Low prices and higher demand by consumers, many of them all too willing to pay any price to drive at and over higher state speed limits, will only increase American dependency on foreign oil. If people are worried about energy, not to mention the environment and the budget deficit, suspending the 1993 gasoline tax increase (many politicians would make it permanent next year) is exactly the wrong way to go.

Now the specter of catastrophic global warming is snapping into sharp focus like a jack-knifed tractor trailer blocking all lanes as we careen along at 75 mph. Sirens are wailing and lights are flashing thanks in large part to the Nobel-winning work of the Intergovernmental Panel on Climate Change and Dr. James Hansen’s NASA-Goddard Climate team, un-muzzled despite Bush Administration threats.

And yet, U.S. energy policy is still “pedal to the metal” on the global warming accelerator — with McCain and Clinton urging us to “step on it” with a gas tax break. The exact opposite of what economists say is the essential step: pricing carbon emissions.

Yale economics professor William Nordhaus offers this litmus test:

[W]hether someone is serious about tackling… global warming can readily be gauged by… what they say about the carbon price. Suppose you hear a public figure who speaks eloquently of the perils of global warming… propose regulating the fuel efficiency of cars, or requiring high efficiency light bulbs or subsidizing ethanol, or providing research for solar power — but nowhere mentions the need to raise the price of carbon.

You should conclude that the proposal is not really serious and does not recognize the central economic message about how to slow climate change. To a first approximation, raising the price of carbon is a necessary and sufficient step for tackling global warming. The rest is largely fluff.

By declining to dangle the $25 bribe before the electorate, Sen. Obama has avoided the fluff. But he hasn’t yet taken the pro-active step of using prices to put the U.S. economy on a low-carbon diet.

Nordhaus provides the intellectual model, explaining that taxes on “bads” such as pollution and waste make our economy more productive and efficient and should therefore be viewed as the opposite of taxes on “goods” like products, income and employment.

Seven-Up soft drink was advertised in the ‘70s as the “Un-Cola.” Perhaps it’s time to market a carbon tax as the “un-tax.”

Photo: Flickr / pbo31


7 Comments »

  1. Very few commentators point out (or even understand) that eliminating the 18.4¢ a gallon gasoline tax will not reduce the gasoline price by any 18.4¢ a gallon; supply constraints and demand will bring the price to close to where it would be otherwise (economists, please help: the "elasticity" this retired engineer is familiar with is Hooke’s Law, as oversimplified in δL = σ/E). The tax holiday is even dumber than Obama says, and too few folks are pointing this out. Encouraging to Obama supporters, but scary if somebody else gets elected to the White House.

    Comment by David Collins — May 2, 2008 @ 7:33 pm

  2. [...] James Handley at the Carbon Tax Center describes the problem in especially vivid terms: Now the specter of catastrophic global warming is snapping into sharp focus like a jack-knifed tractor trailer blocking all lanes as we careen along at 75 mph. Sirens are wailing and lights are flashing thanks in large part to the Nobel-winning work of the Intergovernmental Panel on Climate Change and Dr. James Hansen’s NASA-Goddard Climate team, un-muzzled despite Bush Administration threats. And yet, U.S. energy policy is still “pedal to the metal” on the global warming accelerator — with McCain and Clinton urging us to “step on it” with a gas tax break. The exact opposite of what economists say is the essential step: pricing carbon emissions. [...]

    Pingback by Wonk Room » What The Gas Tax Holiday Has To Do With Global Warming — May 3, 2008 @ 1:10 pm

  3. [...] to the “Headlines” column on our home page almost every day. Take a look at the excellent guest post by James Handley, an extraordinary volunteer at CTC, addressing the gas tax holiday issue. It was [...]

    Pingback by Carbon Tax Center » An Inconvenient Tax - May 2008 — May 4, 2008 @ 6:41 pm

  4. The only problem with this blog is that we are preaching to the converted.  However, it may serve some purpose to rehears the arguments to be used with the unconverted.
     

     
    1.  For all practical purposes the supply curve for gasoline is vertical.  The oil companies have ample incentive to produce all they can. (Except perhaps for political power demonstrations in the context of adverse legislation).
     

     
    2.  If the short-term supply function is vertical, then the price is determined by where it intersects the demand curve. 
     

     
    3.  The price being fixed, it matters little whether 5% is tax and 95% goes to the oil companies, or if 40% is tax and 60% goes to the oil companies. Or even (McCain/Hillary) 0% is tax and 100% goes to the oil companies. Of course it makes a big difference to oil industry profits, public revenues, and oil industry pressure on politicians, but very little difference to the price of gasoline.  
     

     
    4.  Far from the run-up (by no means exhausted) being an argument for a tax-holiday, it is an argument for a tax increase:  Wouldn’t you rather pay $2 to the government (as a tax) and $2 to the oil company than $4 to the oil company? The inconvenient truth is that the oil companies do not have enough gasoline to drive the price back down to $2 per gallon.
     


     

    5. If the price of gasoline is going to be $8 in 2010, wouldn’t we be doing everybody a favor by raising the price to $8 a gallon now?  This would save 2 years of investment in low mpg vehicles, and housing far from public transport.
     

    Comment by Will Candler — May 4, 2008 @ 10:39 pm

  5. Will,
    Yes, spread the word!   Pls. write to magazines & newspapers; call TV & radio shows.  Cite the info. you’ve gleaned here and elsewhere.   Virtually all economists agree on need to use price signals to avert climate disaster; the public and politicians aren’t there (yet).   Revenue-neutrality (e.g., tax with a dividend) will make an "un-tax" palatable and even popular.  British Columbia is boldly leading the way.
    Fuel demand IS "elastic" (but as you note, it’s sluggish).  A doubling of price is estimated to reduce fossil fuel demand by roughly 40%.  Long term elasticity is much higher, as substitutes and more efficient products are developed and become available.
    Rational expectations theory (an important tool of economists and traders) says EXPECTED price affects behavior much more than present price.  Thus, a gradually-increasing carbon tax would have a far greater effect than a one-time tax increase.  We’d install super-efficient insulation, lighting and windows NOW if fossil fuel prices were sure to rise 6% every year from now on.  Similarly, we’d start building wind and concentrated solar farms NOW (and cancel orders for coal-fired monsters).  

    Comment by James Handley — May 5, 2008 @ 9:09 am

  6. A "gas tax" is a NO NO to voters. A "revenue neutral carbon tax" is better. Proceeds somehow to be available to low income people.
     

    Comment by John Burton — May 7, 2008 @ 9:34 am

  7. The simplest, most effective (top down) way of lowering emissions and gas prices would be to lower speed limits - 5 mph across the entire spectrum.

    Comment by Russell Westfall — May 8, 2008 @ 6:33 pm

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