Monday, January 19, 2009

A New Gas Tax

I am usually against any increase in the Federal Gas Tax. My default position on any tax increase is to oppose it until I know more about it. However, I have been stopped cold by a new purposed gas tax increase. Charles Krauthammer writing in the January 12th issue of the Weekly Standard argues for a "Net-Zero Gas Tax". I have read this article a few times now, and I believe Mr. Krauthammer may be onto something. I wanted to discuss it here because I would like my readers opinions on the plan.

There are a number of reasons to support a gas tax. Typically, any substantial increase in a gas tax is usually government's way of trying to get the people to use less gas. Depending on your political stripe, you may support this in the name of a cleaner environment, or as a way of lessening our dependence on foreign oil. Europeans already have a much higher gas tax than ours. According to Mr. Krauthammer, our federal gas tax is about 18.4 cents on the gallon. In Europe, the fuel tax is closer to $4 per gallon.

The Net Zero gas tax is different from most tax porposals. Mr. Krauthammer argues for an increase in the federal gas tax of one dollar. This is a pretty big percentage increase and would make gas prices jump up to around $2.83 or so for a national average. This is typically not the type of behavior one expects in an economy where new stimulus packages are dreamt up and voted on every other week. However, Mr. Krauthammer couples his tax with a corresponding reduction of $14 per week in the FICA tax. This reduction is to hit the books the week before the extra one dollar gas tax rolls out. Why a $14 reduction? The average American buys 14 gallons of gas per week. By letting that average American keep the extra $14 in his pay check, he has the money for the additional federal gas tax. The net zero tax is designed to be revenue neutral. The federal government gets the same money it has been getting. However, Americans can now chose to continue to buy the same amount of gas each week, or cut back some and have a little extra money.

Are there challenges to this? Sure, and Mr. Krauthammer has a solution for many of them. What about people on welfare or social security? They would get an extra $14 on their weekly checks. What about truckers who buy much more than the average 14 gallons of gas each week? Institute some sort of exception or credit for them to keep the new tax from hitting them so hard.

What I see as the brilliance of this proposal is that it doesn't hurt most Americans and it could potentially cause many Americans to change their driving habits. Many of us are still driving like gas is $4 a gallon. If this tax were enacted soon, we could keep those driving habits and potential get a little money for it. Both parties can claim this as a victory. Democrats love new taxes, and can say this one is to fight global warming. Republicans can say this is a way to cut our oil use, thereby hurting heavy oil countries like Saudi Arabia, Venezuela, and Russia. Both parties get a feather in their cap, we might do some good, and the tax becomes one we can decide not to pay by driving less.

The only way out of our economic problems are with creative new approaches. The Net Zero Gas tax is a creative approach worth looking at.


saint said...

This is my knee jerk reaction, but it seems to me this tax would hit harder those people who live in rural areas. I drive 30 miles one way to work. Even with the $14 fica reduction, I would still be losing money on this. The only three options I would see around this are:

1. find a job closer to home. Wouldn't everyone like to do that

2. buy a car which gets better gas mileage

3. move and buy a new house

Options 2 and 3 don't seem reasonable to me. Does our government really want to force people into buying new cars and homes? Most people can't afford that right now.

Just seems like those who live close to their jobs and/or things they like to do come out ahead.

Andy D said...

I don't think it will be harder on those in rural areas, I think it will be harder on those with long commutes. But there is another option you didn't consider. Perhaps the $14 a week cut in tax isn't enough. Maybe it should be $20. That credit right now is designed to be neutral, and maybe the 14 gallon a week estimate is low. How much gas do you buy in a week?

David said...

There is a lot to be said for this idea. It would indeed be harder on those whose circumstances force them to drive more than average, in those cases where the circumstances are hard to change. That is unfortunate, but if you want market based incentives for people to drive less that is unavoidable.

If you make this tax reform neutral for those in the circumstances Saint describes, you will might end up giving a large tax cut to people in different circumstances (giving up the idea of revenue neutrality, because those with difficult circumstances will not be penalized, while the average circumstances are better than the hardest). This would not be so bad, since FICA tax is regressive, and your combo will help those most who need it most.

If you really wanted revenue neutrality and did not want to penalize those who needed to drive a lot and had few easy ways to change this, you would need to have some government agency determine who should be given a break. I'm not even a Libertarian, and I hate that idea.

I believe you can only have two of these three in any one law:

1) A simple logical law which will provide a market incentive to use less gas

2) A law which will not penalize those who need to drive long distances to work and would have a very hard time changing this.

3) A revenue neutral law

Give up three and you give money to those who save gas without penalizing those who don't. Give up two and be unfair to Saint. Give up one and have a complex book of regulations which provides more incentive to prove it would be hard to reduce your gas use than actually reduce it.

saint said...

I would not have a problem with people using less gas getting money, but David is right, there goes the $ neutrallity. I don't want to be penalized because I have to driver farther to work, or don't live in a city were I can take public transportation.

Andy D said...

I think it has to be revenue neutral in order to have a chance of actually becoming law. I think a new study to see what average gas consumption is wouldn't be a bad idea. At the end of the day, any credit is going to give some people extra money, and some people not enough.

the anonymous guy said...

not a bad idea, bro.

the anonymous guy said...

but it would be a better and simpler idea if we just put all of the carbon tax in a big pool and then divided it up evenly every year between every person who files taxes in the U.S.

Andy D said...

That would be simpler if you allowed a carbon tax. This idea has nothing to do with carbon taxes.

the anonymous guy said...

Doesn't matter if it's a gas tax or a carbon tax. What I'm saying is, either way, make it revenue neutral. Just give it all back, evenly, to everybody.

You don't need to make up some complicated scheme to give it back via FICA. Just pool the money and then write the checks.

pack04 said...

Simple question,
If you are going to collect money just to turn around and give it back why collect it in the first place?

You are wasting money by having people administer the program plus mailing cost.

the anonymous guy said...


It makes the economy "smart."

Basically, if you wanna burn more carbon, you pay everybody else. If you don't burn carbon, you've got money in the bank.

Right now, people are burning carbon, and we're all paying for it in higher health care bills, disaster response, failed crops, higher seafood costs, dying forests, etc. We might as well make the carbon-burners pay for the harm they're doing to the rest of us.

What the revenue-neutral carbon tax does is phase out carbon (we've got to do it somehow) while keeping *all* of that tax-money out of government's hands, by giving it right back to all of us.

Andy D said...

Anon, you start to get into an area I wouldn't support with a carbon tax. Most "carbon tax" proposals I have seen are really scams. I don't believe in man-made global warming the way it is preached today, so I won't support anything that starts to smell like a global warming tax.

The interesting thing about the net zero gas tax is that it is designed to lower our usage of gasoline while not costing as much as any straight carbon tax or gas tax might. Also, the way it could be implemented, I could support without feeling like I was supporting a global warming tax.