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September 2, 1990
"Despite Rising Prices, It's Time to Raise Gas Taxes"
San Jose Mercury News
By Timothy Taylor
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WHEN the house is on fire, it may seem a little late for a lecture on the dangers of storing flammable materials. When the price of gasoline is zooming higher by the day, threatening the economy with inflation and recession, a disquisition on the merits of higher gasoline taxes may sound out of place.

But sometimes it takes a disaster to learn a lesson. Gasoline taxes in the United States are far, far too low. As a result, the U.S. economy is overly vulnerable to political disruptions in the Middle East; the environment is overly damaged by smog and air pollution; and the federal budget is tens of billions of dollars further in debt than it needs to be.

There has been no excuse for believing that the world's oil supplies were secure since 1973-74, when the price of gasoline rose by 36 percent and OPEC became a household word. The lesson should have been pounded home when the price of gasoline rose by another 90 percent between 1978 and 1980, spurred by the disruption of oil supplies caused by the fall of the Shah of Iran.

But during the 1970s, it did appear that market forces were encouraging conservation through higher prices. Total U.S. consumption of gasoline rose 37 percent in the decade before 1973, but even as the economy grew 20 percent in the decade after 1973, gasoline consumption actually dropped by 16 percent.

Between conservation and the squabbles at OPEC, the price of gasoline then fell from $1.35 a gallon in 1981 to $1.20 a gallon in 1984 and 1985 to just 93 cents a gallon in 1986. It was then that a golden opportunity was missed to raise gasoline taxes dramatically.

Consider the situation: The federal budget deficits were well over $200 billion in 1985 and 1986. The price of gasoline was falling sharply, so even with a much higher gas tax, consumers could have been paying less at the pump. Economic growth was strong enough that a higher gas tax was unlikely to have caused a recession. Since a gasoline tax raises roughly $1 billion for every penny per gallon, it could have cut the budget deficit by $30 billion a year or more, freeing up funds for investment in the private sector.

In addition, keeping the incentives for conservation high by raising the price of gasoline would have helped treat some unpleasant social problems like air pollution and urban congestion. Finally, we all knew from the 1970s (didn't we?) that oil supplies were as unstable as peace in the Middle East, which has all the stability of a two-legged chair.

The response of Congress to this golden opportunity? In 1983, the federal tax on gasoline was increased from 4 cents a gallon, where it had been since 1959, to 9 cents a gallon. There was no serious effort to raise the gasoline tax further, even when the price fell by 27 cents a gallon from 1985 to 1986.

As gas prices fell, the incentive to consume diminished. Total gasoline consumption slowly began climbing again, rising 3.5 percent from 1983 to the end of the 1980s.

With an election this fall and gas prices rising already, it's hard to imagine politicians raising the gasoline tax this year. Rather than giving every individual and business in the economy a direct incentive to conserve and seek out alternative energy sources by raising the price of gasoline, Congress is more likely to start handing out subsidies and passing new regulations about conservation, hoping to demonstrate its concern while hiding the costs from voters.

But set aside the politics, and consider how large a boost in the gasoline tax should be. At a bare minimum, one might start by raising the federal gasoline tax to where it was in 1960, when gas guzzlers roamed free and suburban sprawl sounded like the American dream. The federal gas tax was 4 cents a gallon in 1960; increased for inflation, that would be 16 cents a gallon today, which implies a tax hike of 7 cents a gallon. (As for state taxes on motor fuel, they were 18 percent of total state revenue in 1960, but are now less than 7 percent.)

The political discussions of raising federal gas taxes have focused on low-ball numbers like these. A recent report by the Congressional Budget Office said that raising the tax on gasoline and diesel fuel by 12 cents per gallon was "representative" of the plans kicking around, and would raise about $12 billion in 1991.

I'd settle for an increase of this magnitude in the next year or so, as part of a package to reduce the budget deficit. But over time, the tax on gasoline should rise considerably higher.

For example, consider having the price of gasoline be close to what it was early in the 1980s. Inflation has been about 40 percent since 1981, when gasoline was $1.35 a gallon, so the 1981 price would amount to $1.90 a gallon today. Even keeping the price somewhat lower than it was in 1981 could mean a gas tax of 40 or 50 cents a gallon.

Lest this seem extreme, consider the nearby table showing gasoline prices and taxes in other developed countries. In Europe, the average price of gasoline was already $2.54 a gallon last year! In many countries, two-thirds of that selling price was government taxes. Even if U.S. gasoline taxes hit $1 a gallon, gasoline would still be a great bargain compared to most of the developed world.

It's little wonder that European economies are less threatened by the rise in gasoline prices. When the price of gasoline jumps 25 cents a gallon in Europe, the increase is only 10 percent, and active conservation programs are already in place because of the high price. But here in the United States, gasoline prices are around $1 a gallon, conservation efforts are still in their infancy and a 25-cent increase bumps up gas prices by a disproportionately larger 25 percent. The idea that gasoline prices should be considerably higher is popping up in some places not normally known as strongholds of the tax-and-spend philosophy. For example, the Aug. 27 issue of Business Week notes that "only much higher gasoline prices are likely to renew conservation efforts," and makes clear that the recent increases are not nearly enough to prod consumers to change their habits significantly. The Sept. 10 issue of Fortune magazine advocates raising the gasoline tax by a nickel each year for the next 20 years.

Jacking a tax sharply higher all at once is never too smart. With gas prices already rising sharply and the economy on the edge of recession, the moment is clearly not right for a major hike in gas taxes.

But it is a good time to announce and begin a long, slow, large increase in gasoline taxes, thus providing plenty of time and incentive for conservation. Over the long haul, it is quite possible for high gasoline prices, energy conservation and economic growth to go hand in hand, as shown by the U.S. economy in the late 1970s and early 1980s, as well as by the current economic performance of Europe and Japan.

All taxes are painful, and a gasoline tax is no exception. But polluted air and congested roads aren't a barrel of laughs, either. Nor is it any great pleasure to have budget deficits again approaching $200 billion, nor to have America's economic stability tied so closely to who decides to attack whom next in the Middle East.

As other developed nations have already realized, a much higher gasoline tax is a comparatively painless choice.

The price of gasoline and taxes on it are expressed in U.S. dollars per gallon, converted from the various national currencies at purchasing power parity exchange rates. Taxes include federal, state, and local taxes in all countries. The figures are for the fourth quarter of 1989, before the recent rise in gasoline prices.

Country Price of
Tax on
Tax as
share of price
United States $1.03 $.32 31.4%
Australia 1.41 .66 46.7%
Canada 1.53 .66 43.2%
Denmark 2.49 1.83 73.4%
France 2.65 2.00 75.5%
Germany 1.95 1.29 66.0%
Italy 3.55 2.17 77.0%
Japan 2.17 1.00 46.2%
Spain 2.59 1.71 65.9%
Sweden 1.97 1.19 60.5%
Switzerland 1.68 1.03 61.4%
United Kingdom 2.46 1.56 63.4%

Source: Organization for Economic Cooperation and Development, International Energy Agency, Energy Prices and Taxes: Fourth Quarter 1989, 1990.

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