Gas Tax Trouble

John McCain and Hillary Clinton have proposed suspending the gasoline tax as a way to deliver financial assistance to struggling families. As I have already discussed on this page, a “gas tax holiday” would provide greater financial benefit to oil companies than consumers. However, for the sake of argument, let us imagine that suspending the 18.4 cents per gallon gasoline tax would actually save consumers 18.4 cents per gallon at the pump. Would suspending the gasoline tax be justifiable? The answer is, still, no.

In his memoirs, George Stephanopoulos, a former adviser to Bill Clinton, describes clashing with Vice President Al Gore in the Clinton White House over Gore’s desire to increase the gasoline tax. Gore, who was the proposal’s leading advocate, believed that increasing the gas tax would reduce pollution. Stephanopoulos argued against a large tax increase because of concern about the political fallout associated with raising taxes. In one particularly heated exchange, an exasperated Gore is said to have yelled:

Damnit, George, we can’t just go for a good night on the news. Think of the long term. This is the right thing to do.

Fifteen years later, the evidence is even stronger that global warming, due to carbon emissions, poses a serious threat to the planet. In addition to harming the environment, the country’s reliance on foreign oil also lends economic support to oppressive regimes in the Middle East. Rather than proposing bold long-term solutions, Senators McCain and Clinton appear more concerned wit having a good night on the news.

If one acknowledges, as do Senators McCain and Clinton, the need for the country to reduce oil consumption, then one should promote policies that facilitate this goal. One efficient way to reduce gasoline consumption would be to raise the gas tax, i.e. the exact opposite of the McCain/Clinton proposal.

In responding to the “gas tax holiday” proposal, economists have pointed out the obvious; “In light of the side effects associated with driving … gasoline taxes should be higher than they are, not lower,” declared Harvard economist Gregory Mankiw. Mankiw, a former Chair of George W. Bush’s Council of Economic Advisers, also proposed raising the gas tax in a 2006 Wall St Journal op-ed piece.

How much does the price of gasoline really effect demand? Analyzing data from Europe, where gasoline prices are much higher than the US, Paul Krugman observes that demand is relatively inelastic in the short run. However, for the long run, Krugman concludes the following:

In the long run, the best estimate of the price elasticity of demand for auto fuel seems to be -0.7. That is, a 10 percent rise in prices will reduce gas consumption by 7 percent. Of this, 4 points come from shifting to cars with better mileage, 3 points from driving less.

But isn’t the gasoline tax regressive? Although the gas tax does place a disproportionate burden on low income households, policymakers could simply couple an increase in the gas tax with a decrease in other taxes, thereby maintaining the desired degree of progressivity in the tax structure. For example, one might consider a scaled-down version of Al Gore’s proposal to phase out the payroll tax in favor of a carbon tax (the type of bold suggestion that is much easier to propose when no longer in office or a candidate).

Of course, raising the gasoline tax will require political courage from our elected officials, a stark contrast to the shameful “gas tax holiday” pandering we have witnessed over the last few weeks.