A New Idea for the Gasoline Tax

by Jim Moss :: Filed Under Energy Policy, Serious Change, The Economy :: November 21st, 2008 @ 4:10 pm EST

The average cost of a gallon of gas in the United States has fallen to $1.98, and is even lower in some places (such as the $1.76 that I saw today in Rock Hill, SC). That’s less than half of what it cost just four months ago. Now I haven’t heard anyone complaining as they’re filling up their tank, but economists and environmentalists are not all convinced that this return to 2003 price levels is a good thing.

Some feel that the drop is a result of the troubled economy and that if gas prices get too low, it will slow down the recovery. Others fear that low prices at the pump will take away the incentive to develop sustainable and environmentally sound alternatives.

The bottom line is that dirt-cheap gas prices are like bacon double cheeseburgers. They taste really good in the moment, but over time, they can do a lot of damage. Unfortunately, the American culture of over-consumption and instant gratification isn’t very good at making short-term sacrifices for long-term gain.

This cultural near-sightedness was demonstrated back in the Carter adminstration, when a proposed 50-cent gas tax increase was soundly defeated. Since then, higher gas taxes have been considered politically unthinkable. Especially in today’s energy climate, where oil prices can fluctuate by 100% or more within a matter of months, the thought of the government adding significantly to the burden of a price spike is enough to give even the most liberal of politicians second thoughts.

My first idea, then, was to add an additional gas tax only when prices are low. For example, if the price is above $3.00 (I’m just throwing out a number for the sake of argument) then there is no additional tax. If it’s below that, the tax is whatever makes the total price $3.00. This would mean that last summer, when prices soared over $4.00, there would have been no additional burden. But right now, with prices at $1.98, the tax would be $1.02.

I soon realized, however, that this plan has a serious flaw. It removes the incentive of oil companies to drop their prices. They would just keep it at $3.00, no matter what the wholesale cost, so that they could get that money instead of the government. The additional tax would then become a windfall subsidy for Big Oil.

So I came up with a compromise. What if the additional tax was a percentage of how much the price was below $3.00 - say 50%? This would mean that right now, the additional tax would be 51 cents, making the adjusted price $2.49. If prices dropped to $1.50 (as they might), the tax would be 75 cents and the price at the pump would be $2.25. The percentage tax would have the double benefit of encouraging oil companies to keep their prices as low as possible, while also not hitting consumers with an extra expense when prices get oppressively high.

All of the taxes raised by this plan would go directly to funding alternative energy research and development. At current prices, this tax would generate about 73 billion dollars a year. And with the side benefit of keeping prices from getting too low, it would also encourage people to buy more fuel efficient cars and to drive less.

Without a doubt, such a plan would face intense political and popular opposition - especially during tough times such as these - but it’s time to start talking about some new and bold ideas. And perhaps, with a new adminstration and a strongly Democratic congress, it might be able to gain a little traction.

What do you think about this new idea?