Alan Reynolds

The newspapers are suddenly full of hypothetical plans to sextuple the federal gasoline tax, with well-timed insinuations that this might be a post-election Republican ploy. On Oct. 8, The New York Times ran a story called, "Raise the Gas Tax? Funny, It Doesn't Sound Republican," citing half a dozen Republican economists and a token Democrat. On Oct. 20, The Wall Street Journal ran "Raise the Gas Tax" by former Bush adviser Greg Mankiw.

As taxes go, a tax on motor fuels (including ethanol) is not one of the worst. Mankiw thus argues that, "An increased reliance on gas taxes over income taxes would make the tax code more favorable to growth." Yet he does not propose to reduce reliance on income taxes. And a tax-induced increase in the cost of transportation of goods, workers and shoppers is surely not favorable to economic growth.

Whether or not a dollar increase in the gas tax would be less damaging to the economy than, say, raising the minimum income tax rate from 10 percent back to 15 percent is not obvious.

Mankiw's most telling argument is that "a $1 per gallon hike in gas tax would bring in $100 billion a year in government revenue." By 2016, however, taxes will be up to $4.1 trillion, according to the Congressional Budget Office (CBO), so Congress might just misplace an extra $100 billion.

Mankiw hopes to use that loot to pay Social Security and Medicare benefits for his generation. But two flat taxes on payrolls were intended for that purpose, and delinking those taxes from the benefits will not boost public support for those collapsing programs. A big problem with phasing in a gas tax increase over 10 years is that young motorists vote.

New York Times columnist John Tierney had a more viable idea a year ago. He proposed raising gasoline taxes by 50 cents, but only if and when gas prices fell -- "an extra dime of tax per gallon whenever the retail price falls by 20 cents." He also proposed that every dime of extra revenue would be tightly earmarked to go into private savings accounts for every adult citizen (or perhaps children, too) with a Social Security number.

When economists speak favorably about an increased gas tax they are often saying, correctly, that it would be more effective and less damaging than corporate average fuel economy (CAF) standards and the gas-guzzler tax (on cars, not SUVs).

A 2004 Congressional Budget Office paper concluded that if CAF standards were raised by 3.8 miles per gallon, it would take 15 years for gasoline consumption to fall by just 10 percent, and the economic cost would be high. Raising the gas tax by 46 cents would also cut fuel consumption by 10 percent, but do so much more promptly.


Alan Reynolds

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