Tuesday, July 28, 2009

US: The Case for a GasolineTax

The last US President to take seriously the idea of a gasoline tax was Jimmy Carter. He was the last because the idea was so unpopular that Ronald Reagan used it to defeat him in the 1980 election. Yet while the idea of a gasoline tax, or an oil tax, might be bad politics, it is good policy.

A gasoline tax means that consumers pay more, but it also give the government a whole lot of tax revenue. As a nation, an oil tax does not change the financial position of the US; it's only a matter of distribution. Hopefully Congress puts that money to good use, such as by paying for universal health care or reducing the deficit, but even if it wastes it entirely, that is sort of beside the point. The really issue is the effect of the tax on market behavior.

Once the tax is applied, oil producers have a choice: they can reduce the price of oil to offset the tax, or they can pass the tax on to consumers. (To simplify things, let's suppose that there is no middle ground: either they reduce the price by the whole amount of the tax, or not at all.) If the producers reduce the price of oil, America wins: consumers pay no more for their gas than they were already paying, and instead of sending hundreds of billions of dollars overseas each year to foreign oil producers, the US now keeps the money at home in the form of tax payments.

If the oil producers don't reduce the price of oil, and the tax drives up the cost of gasoline, then consumer behavior is going to shift -- people will drive smaller cars and/or drive less frequently. We saw this happen in the 1970s, and again in the summer of 2008. It means less oil is consumed, and that has all kinds of benefits: it reduces greenhouse gas emissions that drive global climate change; it reduces the US dependence on foreign and especially Middle Eastern oil; it reduces the money available for terrorist financing in the Middle East; and it reduces the effect of various forms of the "resource curse" that afflict oil-exporting countries, such as anemic economic growth and even civil war. Again, America wins.

To be fair, there are some downsides to an oil tax. Since a disproportionate share of the poor's income is used on gas, an oil tax could be quite regressive if it is not accompanied by a rebate program aimed at low-income households. An oil tax also could lead to government waste if the revenue from the tax is not wisely spent -- though right now the US desperately needs that money to reduce its ballooning deficit.

On balance, an oil tax has enormous potential for economic, political, and environmental good. The idea is rarely discussed in the US anymore because it is dismissed as politically infeasible. Yet if we don't talk about it at all, it never will become politically feasible.