Saturday, January 24, 2009

The Benefit of Increasing Federal Gas Taxes

It is difficult to imagine a situation where anyone on Capitol Hill would think to propose an increase in taxation, yet it seems that many think now is the right time to encourage lawmakers to consider just such a change. Here's why:

Highest average US gas price: $4.114, on 07/14/2008
Current average US gas price: $1.847, on 01/24/2009

In just 6 months, we have seen a 55% drop in prices at the pump. An additional $0.50 in taxation on top of existing prices would be a marginal increase relative to where prices were through most of 2007 and 2008.

Before going any further, I admit that any increase in gas prices, whether market-driven or imposed, is problematic. The cost of goods will increase, as we saw during 2007 and 2008, as a result of higher transportation costs. Those who bought SUVs and can't afford a smaller car could be forced to make difficult decisions about how to budget their money. With increasing joblessness, people who are now unemployed might face inhibited mobility. In many American cities, there may be insufficient public transport infrastructure to provide mobility to those who could no longer afford to drive their cars. Higher gas prices might also affect small businesses already struggling in the current economic climate.

There are, however, many potential benefits to increasing the federal gas tax. An incremental and continuing increase was suggested by the National Surface Transportation Policy and Revenue Study Commission. Evident from the title of the commission, highway infrastructure maintenance was their primary funding concern. In 2007, there was a $105 billion shortfall in funding for such maintenance and that gap is projected to increase each year. Revenue from an increased tax could be used to decrease that deficit.

Despite the obvious importance of highway infrastructure maintenance, I would propose using some of the money raised to expand public transport networks. This will help provide alternatives to those who might be unable to afford gas if prices are increased. It will also reduce the need to expand existing highways, by providing transportation options with smaller carbon footprints.

The increased cost of fuel will also encourage car owners who can afford to continue driving to choose smaller new cars. In the period from January 2007 to November 2008, car sales exceeded truck sales, reversing a trend dating back to 1998. During that period, gas prices reached record highs. As soon as gas prices decreased toward the end of 2008, light truck sales surpassed passenger cars once again. President Obama has identified this pattern of energy cost amnesia as 'shock to trance'. An increase in gas taxes now may help moderate that behavior by encouraging car buyers to always consider buying smaller cars and make all drivers contemplate carefully what driving they must do and what they can avoid to reduce fuel consumption.

Perhaps now is the time to make this change. It is politically risky but will also provide much needed federal income to support mass transit and highway infrastructure while reducing transportation-related GHG emissions. Everyone will feel the pinch but we may be well served by the change.

1 comment:

David Wogan said...

You make some good points. Infrastructure is definitely an important piece of the solution, but it doesn't look good with a lot of rail infrastructure being left out of the infrastructure bill making its way around the Capitol.