With all the talk of tax cuts, this may be an inopportune time to
propose a tax increase. But it is easier to put tax reforms in place
when times are good than when they are bad, and U.S. policy on
gasoline taxation could be much improved.
Gasoline taxes are an emotional issue, as the recent
demonstrations in Europe illustrate. But there are several good
reasons increasing the gasoline tax in the United States makes
First, it is a good idea to tax the consumption of goods that
impose costs on other people. One person's consumption of gasoline
increases emissions of carbon dioxide and other pollutants, and this
imposes environmental costs on everyone. And even those who do not
care much about the environment have to acknowledge that driving
contributes to traffic congestion. Increased taxes on gasoline would
reduce consumption, cutting both pollution and congestion.
But, you might argue, we already have taxes on gasoline: federal,
state and municipal taxes average about 41 cents a gallon, or 28
percent of the price of gasoline. Isn't this enough?
The problem is that the tax is used mostly to pay for road
construction and maintenance. True, the gasoline tax decreases the
use of gasoline, but the road subsidy increases its use.
If we subtract the subsidy from the tax, we end up with a net tax
rate on gasoline in the United States of about 2 percent, which is
much, much lower than net gasoline taxes in the rest of the world.
There is another, quite different reason to tax oil products.
Economists like to tax things that are in fixed supply because
the same amount is available whether or not the tax is imposed.
World oil supplies wax and wane in the short run depending on how
effectively OPEC is enforcing production quotas. But in the long
run, there is only so much oil. Taxing petroleum products will not
reduce the total amount of oil in the ground, it will just slow the
rate at which it is discovered and extracted.
Taxes on gasoline reduce the demand for oil, thereby reducing the
price received by the suppliers of oil. And most of those suppliers
are foreign: the United States now imports 56 percent of its oil,
and OPEC countries control about three-fourths of the world's known
reserves. Taxing foreigners is popular both economically and
politically -- they do not vote. Of course, domestic oil producers
not only vote, they contribute to campaigns, and a tax on gasoline
would be unpopular with them. But deals can be made -- taxes can be
traded for depletion allowances and other accounting goodies to make
such a plan politically viable.
A gasoline tax in a small country falls mostly on the residents
of that country. The world price of oil is essentially independent
of the taxing policies of most countries, since most countries
consume only a small fraction of the amount of oil sold.
But the United States consumes a lot of oil -- almost a quarter
of the world's production. …