The green car buzz at the moment is all about increasing the gas tax: should we or shouldn’t we…

The gas tax stands at 18.4 cents per gallon, a level that hasn’t increased since 1993. Gasoline is currently taxed less than diesel, which is a more efficient fuel. It is taxed more than ethanol, which is not taxed but rather subsidized. Of course, oil companies are also subsidized in indirect ways.

The gas tax would likely be increased gradually over a given period of months or years, to give consumers time to adjust. One interesting suggestion is to factor in the world oil price in the tax: when the price of oil falls the tax goes up, and when the oil price rises the tax goes down.

Positives

Increasing the gas tax would provide a disincentive toward burning gasoline, which emits greenhouse gases (GHGs) and other harmful pollutants. You can look at this as an alternative to incentives for buying fuel efficient vehicles, or simply as a measure to pay for roads and other infrastructure.

Compared to incentives for buying a hybrid, ethanol, etc. a gas tax does not favor any one technology. It lets the market decide on the best way to transport people using less gas. As gas becomes less attractive, consumers can choose between smaller cars, ethanol, natural gas, hybrids, EVs/PHEVs, public transport, self-powered transport, and other options.

Town planning might also be rethought to make our communities more walkable, more livable. The options which are most attractive to consumers will win out, while others will fail. (One question that does arise is whether the choices made independently by individual consumers are in the best interest of society as a whole… think about the individual choices that have led to the sub-prime crisis or to the current state of environmental degradation.)

This proposal also has an edge over subsidizing specific technologies because it should actually bring revenue in for the government, as opposed to increasing the deficit. Whether a gas tax brings money in would really depend on how much it reduced demand for gas: the Laffer curve explains this.

Presumably the gas tax would not be so high and the response would not be so rapid, and gas tax revenues would increase. This money could be spent to revitalize our transportation infrastructure: roads, bridges, public transit, etc. Transportation infrastructure is in need of funding, but it would be ideal for the tax revenue to go to repairing the environment that burning gas is damaging. Improving public transit and community layouts might be a compromise that would accomplish both goals.

Negatives 

Political will: Taxes are not popular, nor are high gas prices. Americans were not happy last summer when oil prices soared, or during the oil shocks of the 1970’s. They might call for their elected officials’ heads if they raised the price of gas with a tax. Right now–with the economy still struggling–especially. The likely resistance from the politicians who actually need to pass the tax is by far the biggest stumbling block: there is no tax increase without the necessary legislation.

Support from the right could be the key. Democrats are not in a position to raise another tax. Free market advocates like the gas tax, though, because it is less perverse than subsidies (allowing the market to decide). In fact, economically a gas tax can be seen as correcting the negative externality that burning gasoline has on society and the environment. The Chamber of Commerce is one right leaning interest group with supports increasing the gas tax, spending big bucks on an ad campaign to promote the idea. In the auto industry, Ford and AutoNation also support the idea.

Impact on poor: Some politicians may continue to oppose increasing the gas tax even with support from the business community and free-market advocates, reasoning that the tax will hurt those who can least afford it.

If this concern proves true the money could be given back to those below a certain income level either through a tax break or a subsidy. If the problem was large enough innovative solutions would also likely arise, such as cheap micro-compacts like the Tata Nano (which sells outside the US for $2,500).

Inflationary pressure: Another objection is that increasing the price of gas would increase the price of everything. The logic being that gasoline is used in the transportation or all goods.

I’m not sure how valid this concern is, since most trucks used to transport goods run on diesel. So, it would depend if the tax increase applied to diesel as well as gasoline. Remember that diesel is already taxed more than gasoline. Since clean diesel vehicles get great gas mileage, the increase probably shouldn’t apply to diesel.

If the price of goods does go up as a result of the gas tax, then producers will have an incentive to find more efficient ways of transporting their goods: those that do can charge lower prices and gain market share from inefficient competitors.

Conclusion

Raising the gas tax seems pretty unlikely politically, but there are a lot of reasons to believe that it’s a good idea. Most of us, myself included, drive gasoline powered cars, but by doing so we damage the environment. We should pay for that damage and be encouraged to change our behavior for the better. A higher gas tax is an even handed way of doing this.