July 12, 2007
Americans Against Gas Tax Increases
Over a period of years I've repeatedly argued that fossil fuels will not get phased out by putting high taxes on them. The reason is simple: In countries where voting publics have a lot of influence over their rulers the elected officials will get scared out of enacting more fuel taxes. Scott Rasmussen of polling firm Rasmussen Reports found in a recent poll that an overwhelming majority of Americans oppose higher gasoline taxes.
Eighty-six percent (86%) of Americans oppose a proposal to increase gasoline taxes by 50 cents a gallon. A Rasmussen Reports national telephone survey found that just 8% favor such a tax hike.
Just 17% of Americans believe that such a gasoline tax hike would have a positive impact on the economy. Seventy-nine percent (79%) believe it would have a negative impact, including 64% who believe the impact would be Very Negative.
Some people who fear global warming think fossil fuels taxes are absolutely necessary in order to save the world. But they need to go back to the drawing more and consider other policy options. Higher prices on petroleum products are pretty much a non-starter. For feasible options look at policies that will lead to cheaper competing non-fossil fuels energy sources. Think carrots, not sticks.
The lower classes already are feeling the pinch from the rises in fuel and food prices. They devote larger percentages of their incomes to fuel and food than do those with high incomes and high net worths.
One reason hiking the gas tax generates such strong opposition is that consumers would react to higher gas prices by cutting back on entertainment expenses, vacations, and major purchases. An earlier survey found that half would cut back on groceries if the price of gas jumps a dollar a gallon.
Since the year 1998 gasoline prices in the United States have already more than doubled in inflation-adjusted terms. That's far more than higher gas tax advocates can hope to accomplish in the United States or in most of the other countries with lower gasoline prices.
The price of gas is probably going to double again, possibly twice in the next decade, in any case, as the middle eastern states run out of oil.
I've never been in favor of gas tax increases because the talk is usually only on the front side - increased taxes would lower consumption. But what happens to that tax income? Some say it should be used for alternative research. Two issues I see -
1. how does the public guarantee that the government will uphold its end of using the money for only that purpose?
2. What happens should gasoline consumption actually decline but the government has become used to the increased income? Does the tax get shifted to the new energy source?
I think the "feebate" schemes proposed by Amory Lovins' RMI group might be a more politically palatable idea. Feebates haven't been tried much before so there's less organized opposition. When there's a tax, it pushes certain hot buttons from vocal groups. The CAFE stuff is stagnant and can be gamed easily. I think everyone should read the "winning the oil endgame" book from the RMI website. While perhaps unrealistically optimistic, it really clearly explains potential policy choices that the US can make in great technical detail.
Here's an early attempt to get it done in California AB 493:
I guess we'll see how far it goes.
As I understand it, from legal perspective, the State cannot tax its citizens when the revenues of that tax are earmarked for a specific purpose. According to the Supreme Court decision in "United States v. Butler 297 U.S. 1 Argued Dec. 9, 10, 1935, Decided Jan. 6, 1936", "A tax, in the general understanding of the term, and as used in the Constitution, signifies an exaction for the support of the Government. The word has never been thought to connote the expropriation of money from one group for the benefit of another." The government cannot begin collecting tax with a pre-defined specific purpose, but only for inclusion of it into the general budget. And how exactly that budget is going to be used will be decided by the Congress - and it can always change.
So, the answer to your Q. #1 is "in no way".
As to Q. #2, if gas consumption is reduced, then there's less need for alt energy, thus it doesn't need to be funded so much. So I don't see a problem there.
Document in Jerry Martinson's link clearly contradicts the idea of the tax collection principle mentioned above. It may be overturned by courts even if adopted. The authors of the document are very careful in naming the appropriation a "surcharge", not a tax, throughout the entire text. The court still may decide that it is just a tax in a disguise.
Greg said that "the State cannot tax its citizens when the revenues of that tax are earmarked for a specific purpose." I'm not a lawyer and perhaps Greg or someone else is so please forgive me and enlighten me if I'm missing some important legal detail or theory.
If "US v. Butler" is widely interpreted this way, then how come certain portions of my property taxes and deed taxes _are_ earmarked for specific purposes? I know for a fact that there have been audits and civil grand jury investigations etc... when to make sure that some promised earmarking of special taxes isn't violated. Indeed even FICA (Social Security) receives a special accounting treatment in the US Federal Budget (although this is no "LOCK-BOX"). From the specific quotes from the case Greg gave, I could see a very different interpretation : That there is no _guarantee_ to the taxee that earmarked tax revenue actually gets spent on what it is supposed to. In other words, if the state fails to spend the money in the specified way, you still have to pay the tax anyway. Legal remedy forcing the state to spend money as promised is decoupled completely from the legal power of the state to enforce revenue collection.
It would really be unfortunate if the concept of "feebates" could face substantial legal challenges in the US. They have the potential to solve many economic and political problems associated with attempting to internalize externalities when there is market failure. Feebates offer great simplicity to consumers and clear, strong, and continuous incentives on suppliers to constantly improve. Potentially they are less prone to cheating, fraud, and manipulation since the incentives and ability to do so on the part of manufacturers are lower than the costs of making the design trade-offs. I know that they have been used in limited experiments in the US and more broadly in parts of Europe. So far I am unaware of legal challenges to the "ear marking" aspect of feebates. I see tremendous inefficiently in purely prescriptive regulations such as codes. Rather _performance_ regulations that offer incentives for continuous improvement are a more efficient way to make changes. Feebates and similar mechanisms are a potentially very important tool for the legitimate interest of the state in regulation of commerce.
I think California AB493 faces a more serious legal problem: the fact that the state is essentially trying to regulate vehicle gas mileage when it is preempted by the federal authority of the EPA, etc... to regulate mileage. This particular issue is winding it's way through the courts/media already.
The problem with just taxing gas (in addition to it's political unpopularity) to internalize the externalities is that consumers aren't fully rational because they not only behave as if they have a high "discount" rate but also the buyers of nearly dead vehicles at the end of their lifespan do not have the financial means or acumen to value gas appropriately. In short Mr. Moneybags buys new cars and then sells them after 40k miles. The aggregated sum of the first buyers are what drives the marketing of the car manufacturers. It's the 2nd and 3rd customer of that very same car that are by necessity in need of utility. There's some formal research that's been done on this sort of market failure and I won't get it into it here.
The problem with the CAFE' rules is that they only apply to cars; they can be "gamed" and there is a major incentive for the car manufacturers to do so. In particular, the station wagon has essentially disappeared. Part of this was consumer taste. However, CAFE' rules penalize station wagons because they are cars but SUVs are "trucks" which were exempted from the CAFE' scheme because the congress didn't want to hurt the farmers who absolutely need trucks. Sounds fair, but is the PT Cruiser or Lexus SUV a "Farm Vehicle"? (To be clear: I'm only rhetorically asking and not intending to defame any of these fine products or their makers or accusing them of un-ethical or un-fair gaming). Attempts to broaden CAFE' to suburban SUVs are difficult and there is substantial lobbyist opposition.
In practical terms in my opinion AB493 faces a more serious problem than legal challenges. While the mechanism is different, it is similar to a broadened CAFE'. It doesn't give a fine enough gradation in vehicle class. A Ford F350 isn't the same as a Ford Ranger. A Crown Vic isn't the same as a Focus. Putting these vehicles in the same bucket does indeed penalize the carpenter who needs the huge truck; or the Taxi driver who needs to sit 5 adults comfortably. The other thing I don't like is I think that a feebate should be "hidden" in the price with no special action on the part of the consumer. Otherwise it is like those annoying "rebate" or "tax break" scams that require you to higher an accountant to figure out.
Some may wonder why it is such a big deal to try to create substantial incentives for fuel efficiency for big vehicles. One may think if there's some unglamorous technology (such as shutting off 4 out of the 8 cylinders during low load or idling) that can greatly improve a Suburban's gas mileage from 12MPG to 15MPG it's not a big deal since it's still a gas guzzler, especially if you can improve a gas-sipping Prius from 48MPG to 60MPG with some other glitzy technology (such as carbon-fiber light weighting).
Simple math shows how this intuitive thinking based on the magnitude of a reciprocal number can be very misleading. Consider each Suburban over 150k life will burn 12500Gal that if the Suburban gets 12MPG and 10000Gal if a hi-tech suburban gets 15MPG, saving 2500Gal. A 48MPG Prius burns 3125Gal and a hi-tech 60MPG Prius burns 2500Gal, saving 625Gal - 1875Gal less than the high-tech Suburban. If there are just as many Suburbans on the road as there are Prius's, which hi-tech advance is more important? We're wasting a lot of gas by essentially ignoring any potential regulation incentivizing the Suburban to become more efficient. And we are delaying that regulation by trying to politically sell some expanded CAFE scheme where the Walton family's Suburban towing a concrete mixer is put in the same bucket as a yuppie car.
CAFE standards exist in the United States because Americans do not want to pay high taxes for gasoline. If Americans were willing to accept European-style gasoline taxes then few car buyers would opt for a Suburban or Cadillac Escalade.
CAFE is a way for a government to modify consumer behavior while minimizing resentment of government. Therefore it is an economically inefficient way to modify behavior.
You can point to flaws in CAFE. But some of those flaws are unfixable for a number of reasons. First off, each vehicle has many uses. Categorizing vehicles to give them different MPG standards depending on the nature of each vehicle does not work because it can't deal with the multiple use problem. Second, many of the uses of vehicles that supposedly require larger vehicles do not require the larger vehicles all the time. A farmer would feel the necessity to drive a smaller vehicle when not hauling stuff if the price of gasoline was $8 a gallon. But trying to get that farmer to drive the smaller vehicle when, say, going to a convenience store won't work with $3/gallon gasoline and CAFE.
I believe that some taxes that are earmarked for specific purposes exist only because no one had the stubbornness to challenge them all the way up to the Supreme Court. And, after all, the Supreme Court doesn't HAVE TO decide cases based on its own precedents, you see? So even if one is insistent enough, it does not guarantee the expected result. The US vs Butler was decided 70 years ago, so the judges' opinions have changed... along with judges.
I find your observation about "food chain" of vehicle buyers interesting. I only wonder why the same thing doesn't happen in Europe, or at least it is not so pronounced. Is it indeed that $7/gallon gasoline makes even the affluent people think twice? But then, a few years ago, gasoline wasn't THAT expensive in EU, yet the buying pattern doesn't seem to have changed significantly.
As to the ways to reduce fuel consumption while considering farmers' situation, I may suggest several things.
(1) Prohibit access of SUVs to parkways. (farmers don't use parkways!)
(2) Tax vehicles differentially - by state (farming states like Iowa vs. non-farming ones, like NY)
(3) Encourage multi-vehicle ownership by eliminating insurance for 3rd and subsequent vehicle while making it impossible to drive more than two vehicles simultaneously. This way, people will be able to choose the vehicle that suits the task.
I would suggest a tariff on imported oil that makes 65 dollars/barrel the minimum cost of imported fossil fuels. If the market price is over 65 nothing happens if the market price is below 65 the tariff makes up the difference. This would give investors solid knowledge about the minimum future price of fuel. So they would be secure on the return from investing in alternative fuels that are competitive at 65 dollars a barrel or less.
"In countries where voting publics have a lot of influence over their rulers the elected officials will get scared out of enacting more fuel taxes."
You only have to look at Europe to see that this is false. Every developed country has higher fuel taxes than the US. Their parliaments voted them in.
"For feasible options look at policies that will lead to cheaper competing non-fossil fuels energy sources. Think carrots, not sticks."
The candy-only strategy ignores the value of conservation. We need to use less energy than we do now. We can shift among sources, but they all have negative impact on the environment, especially as they scale to the point of being economically significant. Corn-based ethanol is the poster child for this as it drives up the price of all goods that use corn for other purposes, and as we maximize production at the expense of soil conservation, etc.
"The lower classes already are feeling the pinch from the rises in fuel and food prices."
See above, but the real answer here is to give the money back via refundable tax credits that adjust based on income. Average consumers feel no pain, but guzzlers do. Low income folks on average consume less energy (it's already too expensive) and would come out ahead.
What we should do is announce that over the next 10 years we will increase gas taxes each year. We could increase it 10 cents a year for the first 3 years, 25 cents for the next 3, 50 for the next 2, and $1 for the final 2 for a total of $4.05. That gives people time to adjust their habits and still sends a strong message.
As for car food chains: Yes, upper class people can buy SUVs. But those cars will depreciate more rapidly if lower class people can't afford to buy them.
What I'd like to know: How many miles a year does a 7 year old SUV get driven as compared to a 7 year old compact car.
First off, the voters in Europe have less influence over their governments than voters in America. The creation of the EU is a demonstration of this.
Second, urban dwellers are less opposed to higher gasoline prices because they have less need to drive greater distances. So the US has a larger fraction of its voting public that feels the need to travel distances than is the case in Europe.
As for your policy recommendation of higher taxes: That'll never happen as long as huge majorities of the American people are strongly opposed.
Conservation: It is more doable for housing, especially new housing construction. People do not want limits on what they can do and they do not want to pay more.
Randall, a couple of thoughts:
First, you said: "First off, the voters in Europe have less influence over their governments than voters in America. The creation of the EU is a demonstration of this. "
Could you provide more info on this? It seems to me that parliament style government is more, rather than less responsive to voters.
2nd, I would suggest that a combination of gas taxes and CAFE would be most economically efficient, as there is a partial market failure due to the complexity of a vehicle purchase. This is similar to home buying (though not quite as bad): there are so many variables and needs in one purchase that buyers can't focus on MPG as much as we might think they should. Further, there isn't the infinite variety of choices that would be needed for market efficiency.
Finally, its seems clear to me that 1) gas taxes need to be refunded to gas consumers (voters, business), in a way that maintains progressivity and minimizes pain, while maintaining efficiency incentives, and 2) gas taxes need a lot of education and selling by government and media. They've been used as a political weapon for so long that a lot of this selling is needed. The current example of this is Rep Dingell seting up carbon taxes for failure.
To amplify on this last: it seems to me that business is still fiercely opposed to carbon/gas taxes. Until business is on board, voters don't matter so much. Dingell is a good example of this: he's protecting Detroit.
It seems it would be pretty simple to "feebate" the money from a gas tax back to the people - all you'd have to do is increase the personal exemption by the average gas savings. For the average driver, it would be a wash. For people who use their cars less, it's a gain. For suckers like me that commute 60 miles a day, it would be a loss.
Arguments for higher gasoline taxes are a waste of time because the market is going to drive gasoline prices much higher. We are either at or approaching the peak of world oil production. If Robert Rapier is correct we will see another 5 million barrels daily increase in oil production while demand goes even higher and prices go higher even before we peak. If some others are right then we've already peaked.
What I want to know: are we headed toward a deep recession as a result?