What’s So Difficult About a Gas Tax?

Tom Friedman in his latest column Real Men Tax Gas writes about a gas tax that could potentially fund healthcare, reduce the deficit and still have some leftover to make it up to people who can’t afford the tax:

Such a tax would make our economy healthier by reducing the deficit, by stimulating the renewable energy industry, by strengthening the dollar through shrinking oil imports and by helping to shift the burden of health care away from business to government so our companies can compete better globally. Such a tax would make our population healthier by expanding health care and reducing emissions. Such a tax would make our national-security healthier by shrinking our dependence on oil from countries that have drawn a bull’s-eye on our backs and by increasing our leverage over petro-dictators, like those in Iran, Russia and Venezuela, through shrinking their oil incomes.

Most economists would have preferred a gas tax to the cap and trade legislation that is in Congress. But a gas tax is off the table politically. It is so off the table that there hasn’t even been a serious debate over it. So no one really understands why it is off the table, except, I suppose Washington insiders.

In the US gasoline (called petrol in most countries) costs less to the consumer compared to just about any non-oil exporting country. So why is it that the American consumer won’t tolerate an increase in the price of gas? Because nobody cares about what is the “right” price or the “customary” price of a staple commodity. What matters to voters is the inflation. Just like increases in taxes matter more than the average level of taxation. Or like in India, an increase in the domestic price of diesel leads to trucker strikes, even when the price is well below the cost of petrol. What the voter is saying is in all these cases is “I neither care nor understand what your reasons are for the price hike, I just don’t want it.”

Last year, the price of crude shot up to $140. The price of gas in the US followed suit doubling in just a few months. There was a lot of pain felt but there were no ‘tea party’ protests since (at least in the US) it is OK to be pummeled by prices set in the market. What is not OK is for the government to administer some bitter medicine in the form of a gas tax that can help lower the demand for oil providing a more long-term solution to the many ills associated with our gas guzzling habits. That is the political reality that holds back politicians from even touching the gas tax issue.

How about if a gas tax bill was designed to be totally neutral to the consumer? Whatever consumers spent on the gas tax would be returned to them in the form of say, an increase in the standard deduction. The problem with simple, flat tax ‘give backs’ like an increase in standard deduction is that it would end up hurting some consumers (while benefitting others). If some segments of the population like the rural poor bear a disproportionate share of the burden, the tax would be regressive and wouldn’t stand a chance of becoming law. Other problem areas would be small businesses where the cost of gas can be a big part of their total costs (e.g. a pizza delivery business). By the time you protect all these constituencies, the bill becomes less a simple gas tax and more a huge complex piece of legislation like Cap and Trade which is weaker and has loopholes for special interests.

Eventually, this is about guts. Unlike healthcare where there are 47 million uninsured Americans pushing for reform, there are no voters asking for a gas tax. And if you think the health insurance lobby is fiercely defending its turf, wait till you see Big Oil in action. To go up against these odds, even for something that can do so much good, needs real guts, perhaps even a bit of a death wish. It could end your political career quickly. So its no wonder that a gas tax is not on the legislative agenda.

But then how was Denmark able to slap a $5 per gallon tax on gas and make it work? Maybe they’re just smarter people.


  1. There are a couple of differences between Denmark (and other smaller European countries) and the United States. The geographic size and the development of public transport are two key differences. There are very few places in the US where you can hop on a bicycle and go to work. Over the years, Americans have come to love their independence that driving a car gives them. Increasing a tax on gas, will also increase prices of all other products and services which depend on transportation e.g. food, travel, clothing etc.

    Having said all that, you do make some valid points. The gas tax increase cannot be done in isolation unless some of that tax is channeled into building public transportation and encouraging R&D into other sources of energy. No one in Washington has enough political capital to spend, to get all of these things done properly. It will only be some strong shock which will cause some definite action to be taken by governments, businesses and common citizens.


  2. sriks says:

    I agree that almost all political will stems from Dollars. The R's have the Oil lobby to take care of & the D's have the Auto lobby to take care of. Plus like you mention it is so easy to point to the out cry & opposition that would be there against such a non-populist move. I just find it surprising how much the thought free-markets know best has seeped into the US psyche that anything interventionist that is better for the majority is not even considered. The Health care debate is case in point. Strong economic theory that shows why a fragmented coverage model will never cover 100% of the people is not even discussed. Despite the Wall street collapse no one is willing to question the implicit assumptions that the market always knows best.
    What intrigues me though is that the strength of the Dollar stems from the power of the goverment to tax such a big economy. But if the on-the-ground reality is the inability of the govt. to raise taxes (forget Gas even normal taxes) then why is there no run of that currency?


  3. sks says:

    Basab, That is why US is US and Denmark is Denmark. Ever wondered why you are in US and not in Denmark?


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