Let’s double the price of gasoline. And let’s do it today, through federal taxation.
No, I’m not yet ready to propose that step, but it is a concept that deserves careful consideration. No one likes paying higher taxes. But this idea merits more than a knee-jerk reaction. Thinking through its implications may generate additional ideas that will really make a positive difference.
One of the critical challenges to our economic well-being today is the issue of energy — how much we use and in what form.
The gas-tax idea has been around for several decades and is starting to generate a bit more attention, but still only cautious rumblings.
It came to the forefront in the 1970s, when the oil embargo spiked gasoline prices and created huge flows of petro-dollars to OPEC nations.
The idea is simple, but it’s terrible politics. In fact, during the recent, unprecedented oil price run-up, politicians called for the reverse, giving relief by cutting the tax.
That might have had meaning as a political ploy, but it would have had an insignificant impact on alleviating economic hardship, since the federal tax on gasoline is only $0.18 per gallon. (State taxes add an average of $0.25 per gallon, ranging from a low of $0.08 in Alaska to a high of $0.45 in California.)
Aside from the token gesture, the elimination of the federal tax would have severely impacted our road system since 84 percent of those funds shore up a badly deteriorating highway system, and the balance goes for much-needed mass transit projects.
Two numbers have special significance. First, the Energy Information Administration estimates that 70 percent of our petroleum consumption goes into transportation. Second, in 2007, that translated into 390 million gallons of gasoline a day (9.3 million barrels, at 42 gallons a barrel).
There have been many studies on the price elasticity of gasoline. A price-elastic product is one which, as prices rise, consumption falls. A price-inelastic product is one where consumption doesn’t change as prices go up.
When gasoline was in the $1-$2 range, many of the studies showed that price changes had two effects. In the short term, the effect was almost negligible (e.g. a 10 percent increase in price might result in a 2 percent decrease in consumption).
In the long range, the impact seemed a little greater. There were a number of economists who speculated that the price of gasoline would remain relatively price-inelastic until it hit $3 or more, at which time the relationship would change, and price would make a bigger difference. Recent history seems to bear out that assumption.
The concept, originally proposed back in the 1970s after prices shifted back toward “normal,” was to raise the tax on cheap gasoline so that the price was $3. Then any hostile moves by producers would be offset by declining demand, thus eliminating much of the benefit (and therefore the incentive) to raise those prices. This was not a popular suggestion.
The speculative run-up that we have just seen seems to confirm the validity of the price-elasticity theory. Clearly, supply and demand considerations were insufficient to justify oil prices in the $150-per-barrel range.
But when oil prices hit that level and gasoline prices rose to $4 per gallon, conservation kicked in big time. People reduced driving, SUVs lost much of their appeal, and all over the nation there was a cry for developing alternate energy sources.
Now that prices at the pump have dropped (currently about averaging $1.80 nationwide, with petroleum prices under $40 per barrel), much of that pressure has dissipated. But this is the time that presents an opportunity to do something for the future.
Let’s assume the government imposed an additional tax of $1.20 per gallon, raising the average price of gasoline to $3.
This seems to be somewhere around the “magical number” where purchases of gas become price sensitive.
I know, the knee-jerk reaction.
But let’s suppose that $1.20 were given back to the public in other forms (as opposed to being sucked into the black hole that represents much of government spending, an assumption which, I recognize, has its perils).
The tax, based upon the past year’s consumption figures would generate $468 million in revenue a day. That’s more than $170 billion per year.
Now what could be done with that $170 billion? One proposal would be to use it to reduce payroll taxes, giving it right back to the consumer.
It could go into funding the Social Security system, into health care or research, or, in the immediate term, it could be used to support measures needed to counter the current economic situation (e.g. extended unemployment benefits).
It could be used to encourage alternative energy development, or even oil exploration. There are many ways this fund could be used productively for the benefit of the nation.
The tax would encourage conservation and the development of more fuel-efficient cars and trucks. It should also reduce the transfer of funds out of the country to pay for increases in petroleum prices — much of which, in the past, has gone to nations hostile to America, and some of which has, undoubtedly, gone to support terrorist activities directed against us.
Paying higher taxes is never fun. But it is important to realize that freedom is never free.
It takes some effort and some sacrifice to maintain what we have, and this idea seems to be one that has merit. The
impact could be minimalized, with an immediate payback (e.g. in the form of reduced payroll taxes or better health insurance).
Or a longer range approach could be taken (e.g. with medical research), where the benefits would not be realized as quickly but might be even greater.
The most important point of all is that there is an opportunity now. If we wait until there is another surge in oil prices, the window may close, and this time it may close forever.
The question is whether “Washington” has the courage to consider proposals of this nature, and the key to that will be the willingness of all of us to give a little to gain a lot.
In retrospect: Several weeks ago I wrote about the wonders of this country’s open spaces in contrast with crowded urban living. A recent study published in the American Journal of Preventive Medicine reported that urban children who spend more time in open spaces with greenery are healthier, slimmer and less prone to ADHD symptoms than those who are hemmed in by bricks, cement and asphalt.
Similarly, adults experienced greater longevity, lower weight gain and less stress. So there may be even more to the esthetics of our wonderful country.
Dr. Melvyn Copen lives in both Georgia and Arizona. He is an educator and businessman who has worked and lived in many foreign countries and provides consulting services throughout the world. His column appears every other Wednesday. Please share your comments with him via e-mail at firstname.lastname@example.org.