Legal Commentary

Is This a Good Time to Raise Taxes on Gasoline? Becker

By Gary Becker

When we blogged about gasoline taxes on July 21, 2008, the sharp rise in gasoline prices to over $4 a gallon reduced the gasoline consumption that contributes to global warming, local pollution, auto accidents, congestion, and other externalities from driving. I suggested that if it were desirable to use gas taxes to reduce gasoline consumption, a better time would be when gasoline prices were much lower.

In the little over five months since that discussion, average gasoline prices in the United States have declined by more than 60 percent to about $1.50 a gallon. In light of the July discussion, is this a good time for the federal government, perhaps particularly for local and state governments, to raise gasoline taxes? I believe that despite the free fall in gas prices, other events since that earlier posting have greatly weakened the case for higher gas taxes at this time.

I have opposed the bailout of GM, Ford, and Chrysler through federal loans and outright grants, and believe these companies should have been allowed to go into bankruptcy proceedings (see, e.g., my post on Dec. 16th, 2008). However, given that President Bush started a bailout, and that the new Congress is likely to extend the bailout, this would be a bad time to raise gas taxes. For higher gas prices will increase the financial difficulties of the American automakers by reducing driving and shifting demand away from the SUVs, minivans, and trucks that these companies have depended on for much of their revenues.

A further weakening of the financial position of American carmakers would increase the size of the bailout of the American auto industry needed to prevent it from going bankrupt. This implies that higher gas taxes would have a multiplier effect on the tax burden facing American families and businesses- not only would they have to pay more for gas, but they also would at some point have to pay higher taxes to finance a larger bailout.

A related reason to avoid raising gas taxes now that was not so apparent when we blogged in July is that the world is in a serious recession that will get worse before it gets better. Many lower and middle-income families have lost their jobs, and many more will suffer reduced incomes during the coming months. Since increasing numbers of individuals are facing more difficult economic circumstances, this hardly is the time to raise taxes on cars used to commute to work and to shop, especially since higher gas taxes would lead to greater government spending on bailing out American carmakers. Fiscal policy during a recession should, if anything, cut rather than raise taxes, be they taxes on gasoline, personal incomes, or business.

President-elect Obama has reached a similar conclusion. The New York Times of Jan. 3 reported that when he was asked last month whether he would consider a much larger federal tax on gasoline, given the sharp fall in gas prices, Mr. Obama replied that American families were hurting because of rising unemployment and falling home values. They quote him as saying "So putting additional burdens on American families right now, I think, is a mistake".

Some proponents of the bailout to automakers want to make payments to GM, Ford, and Chrysler conditional on their making cars that are more friendly to the environment through getting greater miles per gallon of gasoline used. One frequently suggested way to do that would be to raise the Corporate Average Fuel Economy (CAFÉ) requirements at a more rapid rate than under present law. CAFÉ standards are presently at 27.5 mpg for cars, and 22.2 mpg for pickups, SUVs, and minivans, and they are scheduled to rise to much higher levels starting in 2011. Since foreign carmakers are better at making fuel-efficient cars than are American companies, any sharp increase in CAFÉ requirements would further weaken the competitive position of the American companies. Hence, this too would defeat the alleged purpose of the auto bailout, which is to help American companies reduce their financial problems, so that they can compete more effectively against foreign automakers.

Although neither higher gas taxes nor tougher fuel-efficiency standards are desirable at this time, higher taxes would be preferable to tougher standards. Both hurt GM and the other American car manufacturers, but bigger taxes are a more efficient way to economize on the use of gasoline. Higher gas prices encourage consumers to drive fewer miles with the cars they already own, especially SUVs and other gas-guzzlers. Higher gas prices also give consumers an incentive to shift purchases of new cars to more fuel-efficient cars. Bigger gas taxes stimulate greater investments in R&D to produce better hybrids, battery-driven cars, and other types of cars that rely less on gasoline. In essence, raising the tax on gasoline encourage consumers and businesses to economize on all their margins of adjustment.

Tougher fuel standards encourage economies in the use of gasoline only by mandating the production of cars that get more miles per gallon of gasoline used. However, unlike what happens with higher gas prices, owners of more fuel-efficient cars will increase rather than decrease how much they drive precisely because these cars are more fuel-efficient. That partly offsets the reduction in gas consumption from driving more efficient cars.

Full post as published by Becker-Posner Blog on January 04, 2009 (boomark / email).