The Case for Cheap Gasoline

The Case for Cheap Gasoline

Could an increase in gasoline taxes help curb America's dependence on foreign oil?

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the source: “The Uneasy Case for Higher Gasoline Taxes” by Ian W. H. Parry, in The Milken Institute Review, 2005: No. 4.

The logic of increasing taxes on gasoline seems a no-brainer to many people who worry about America’s dependence on foreign oil, global warming, and traffic congestion. At an average of 40 cents per gallon, federal and state taxes on gas are about the same, in inflation-adjusted terms, as they were in 1960, and they are a fraction of taxes paid in Europe. Yet raising gas taxes wouldn’t be the most effective way to address these problems, argues Ian W. H. Parry, a senior fellow at Resources for the Future, a Washington-based think tank.

Consider the costs of oil dependence. America currently gets 56 percent of its oil from abroad, and that percentage is expected to grow. This dependence leaves Americans vulnerable to oil price–related disruptions; also, since Americans are the world’s largest consumers of oil, their purchases may drive up the world price. Taking those risks into account, economists estimate the costs of oil dependence at no more (and perhaps much less) than about 30 cents a gallon—in other words, less than the average taxes already imposed.

The geopolitical costs of oil dependence—that it might undermine U.S. foreign policy or national security—are virtually impossible to quantify, Parry notes, but upping  fuel taxes would be unlikely to affect them much. Doubling the current federal tax of 18.4 cents per gallon, for instance, might reduce U.S. oil demand by 500,000 barrels a day—a drop in the bucket in a world that consumes 85 million barrels a day.

What about global warming? It’s hard to put a price tag on future damage, but Parry thinks the best estimate is Yale economist William Nordhaus’s $15 per ton of carbon emitted today. However, gasoline is not very rich in carbon; imposing a carbon tax equivalent to $15 per ton of carbon would translate into a gas tax of less than 4 cents per gallon. Coal and other fuels release much more carbon.

“Broader-based taxes that cover all fuel uses—electricity generation, in particular—would make more sense” than a gas tax, says Parry. “By the same token, extending fuel taxation to other petroleum products (jet fuel, heating oil, petro­chemicals, etc.) would be a more logical first step to reducing oil use than raising gasoline taxes.”

Targeting traffic congestion raises another set of complications. In theory, the costs of traffic congestion are large enough to justify a gas tax of between 60 cents and $1 per gallon. But if such a tax were imposed, many drivers would switch to more fuel-efficient vehicles. That’s a good thing, of course, but it would have a perverse effect on congestion. By keeping the cost of driving down, fuel efficiency would wash out more than half the positive effects of the higher tax.

Parry has a better idea: Tax driving directly, not fuel. He thinks that new electronic metering systems like those coming into use in the United Kingdom offer a superior path. (Britain already has the highest fuel prices and the worst congestion in Europe.) Metering would make it possible to charge people “according to where and when the vehicles are in use.” People who insisted on driving in gridlocked cities during rush hour would pay a premium price per mile, while those zipping along on empty rural roads would pay a fraction of that sum. Add a carbon tax to attack global warming and a push to develop fuel cells and other alternatives to the internal-combustion engine, and America would be on the road to rational management of its energy problems.

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