Wednesday, November 01, 2006

The Gas Tax, Hockey Penalties, and Time-outs

I found an interesting chart on the Foreign Policy web site this morning that highlights some of the conflicted logic surrounding US energy and tax policies.

The gasoline tax rate within the US is literally less than one-tenth the comparable tax in Europe while per-capita gas consumption is more than four times higher. The anti-correlation is very illuminating. And while there are clearly many factors driving gasoline consumption relative to Europe such as the very area over which Americans much drive being larger than the average European roaming distance, even a quick glance at the chart shows that if the US is really serious about immediately decreasing the dependency on foreign, there is a very simple policy decision that could have broad and immediate impact, and is probably worth an experiment. The US administration could substantially raise the gasoline tax to a meaningful level, and see what happens.

There is a reasonable likelihood that doubling the effective price of gas could dramatically reduce consumption just through price elasticity alone. For those of you not familiar with retail sales economics, price elasticity is the relationship between the price of goods and the volume of sales at that price. If you lower the price, you sell more (the volume increases), and conversely, if you price goods higher, your sales volume will decrease. So retail sales strategy is all about picking the right price so that your sales price times the volume of sales is maximized (to maximize total revenues). So if the US raises the price of gasoline with an aggressive tax, the sales volume should decrease substantially.

The other effect such a tax levy might induce is that alternative energy sources could immediately become more cost effective relative to gasoline, and that economic advantage combined with simple market forces would likely drive entire energy, automotive and aviation industries to undertake much more accelerated transitions to alternative renewable energy sources and further decrease gasoline consumption.

But of course, there is one giant sector of the US economy that has understandably dug in its heals at the prospect of such a tax. The Oil industry would clearly be decimated if the US's per-capita gas consumption was cut to one-quarter of its current rate, and they have understandably invested hundreds of millions of dollars in lobbying efforts and supportive politicians to vigorously resist the introduction of any tax that would have even the slightest deleterious effect on consumption.

But government is supposed to be about understanding, planning for, and managing the larger-scale and longer-term consequences of suborning the national economy to a single (even an important) special interest. A committed and creative administration could even come up with solutions such as applying the proceeds of such a tax to support the very industries that might suffer through such a transition that is critical to national interests. Imagine if that flood of tax proceeds was directed solely to the energy industry companies for use in transitioning to renewable energy sources? Then Chevron and Exxon/Mobile would have a lot less to complain about. Would they come along willingly? Probably not, because that sort of sea change would put their core business at risk, and even with a generous R&D and new infrastructure tax subsidy they might have to sacrifice some of their record-breaking profits to stay ahead of some smaller and more aggressive companies that are starting from the same level as far as renewable energy investment goes.

But I've always said that you can tell how serious someone is about fixing a problem by how seriously they will impose penalties to change someone's behavior. So far, our efforts at reducing foreign energy dependence strike me as so much lip service. Yes, the analogy is a stretch, but I find the situation strikingly similar to Hockey. The sporting industry's half-hearted testimonials that hockey really is about the sport don't jibe with the fact that purposefully splitting someone's head open with your stick and then taking several swings at someone to start a bench-clearing brawl results in a few minutes in the penalty box. That just strikes me as not all that different from giving your toddler a 3 minute time-out for taking a switch blade to a playing companion. As they say in the Big House, the time must fit the crime. So examining the longstanding lax discipline in hockey, one can only conclude that they aren't all that serious about fixing any problem with the sport and that perhaps they need the sensationalism to draw crowds, as with Circus Maximus at its peak. If someone is really serious about fixing problem behaviors, discipline must be meaningful.

If Brazil can become energy independent in about 12 years through strong government direction, how long should it take the US? When will our government finally begin to lead a concerted effort. I bet we could cut that time in half if we just quadrupled the gasoline tax.

Anyone else have other suggestions or comments?


Anonymous said...

Do not agree with tax increases. It would have a disastrous effect on the whole economy. Phil

Phillip Alvelda said...

It is certainly possible that there would be a short term impact on the economy due to the fact that people would all-of-a-sudden have to pay more for the gas they are consuming. But note that other countries who have taken more of these steps than the US are not stifling their economy at all. They are making their cars and airplanes, and ultimately their countries more efficient, and driving their industries to support a growing international need for energy economy. Just compare Toyoda and Ford, for example.

On that note, I agree that those Luddite companies that do not have competitive gas mileage technologies will suffer. But they should suffer, and they should go out of business unless they can bring competitive products to market.

Also, you speak of such a tax as if a.) it would persist in perpetuity, and b.) as if that tax is more damaging to our economy than the foreign energy dependence.

But note that the tax is linked directly to the overconsumption that is provably changeable with existing technologies, and more rigorous emission/mileage standards on vehicles, and many of these more aggressive standards and taxes are already in place in most foreign countries.

Any short term pain should serve to guide the mass market away from those activities and technologies, and with improved distribution of already existing conservation and renewable energy sources, cars and whatnot, consumption should decrease, and so will the effective tax rate alongside. Ultimately keep in mind that we are talking about a tax RATE increase tied to consumption. With the correct incentives and use of the tax proceeds, in the very long run, as our energy infrastructure shifts off of oil (which is inevitable, by the way)the sales volume will decrease to such an extent that the total tax (rate*volume) will be less than the original tax rate. It will take a while, yes. But the whole point is to accelerate the process with strong incentives (and disincentives).

But even if there is some short term pain, which I doubt would be substantial outside the oil and industry and the laggards of the auto industry which I believe should suffer, that was the whole point of the article.

Without some real consequences of imminent economic pain, there is no incentive to change. I would pay the tax happily in a first experiment, and for as long as it continued to drive a substantial reduction in oil consumption.

As an aside, I think the bonus economic return on not having to care anymore what happens to the control of oil in the Middle East would also be substantial. (Easily over $80 billion this year just for Iraq)

Anonymous said...

To Phil: Your comment on this post is not surprising. It is my assumption that you do not support any tax increases for any reason, no matter how laudable the cause or required the funds. Is this a true reflection of your beliefs?

To Phillip: I would be concerned that a large gas tax would disproportionally effect the poor.

At least in the state of California, everyone has to use their car to get to their jobs. If the rich have to pay a little bit more to get to their high-paying jobs, that's one thing, but if the poor have to take the same hit, it could be disasterous both to their ability to support themselves, as well as to the industries that rely on their services and support.

It would seem as if any significant gas tax would have to be preceded or accompanied by a real attempt at public transportation (another issue Phil opposes, I think.)

Unknown said...

There are ways to address the concerns both of Phillip and the "liberal wife." Simply doubling the existing federal tax over a year or two would, as Phil suggests, have a devastating impact on the economy--an impact that would fall hardest on low-income Americans. A solution I like would be to raise the tax incrementally so as to reach the desired level by a decade or so. In years in which global crude oil prices drop, the tax would be increased by an amount sufficient to ensure that retail gasoline prices increase only by the amount they would have done had crude oil prices remained at the previous year's level. In years in which crude prices increase sharply, the total tax could be reduced so that retail prices rise, but only by the same amount as in previous years.

This incremental approach has important virtues. On the macroeconomic side, it would send a clear, unmistakable signal to business and industry about the future cost of gasoline. This clear price/time signal gives industry plenty of time to adjust and prepare. On the micro side, the increase would be big enough to change consumers' behavior, but not so large and abrupt that it would cause severe economic disruption.

As for the revenues, I agree with "the wife" that they should be used to stimulate mass transit solutions. In addition, the new Congress should immediately revoke the billions in subsidies to oil companies in the 2005 Energy Policy Act. That money should be redirected to fund alternative vehicle technologies--especially electric vehicles--and alternative fuel options.

I wouldn't give a penny to the oil companies. They have lots of smart people who can see the future coming. They can either adjust, or die. It's up to them.

Phil needs to realize that he and other taxpayers already are paying gasoline taxes not reflected in the price of the pump. These "external" costs include the impacts of global warming, health impacts of air pollution, and most importantly--as Phillip correctly notes-- the cost of defending oil- producing nations from invasion.

The key to reducing oil imports is changing consumer behavior. There are multiple reasons why people prefer to drive alone in their cars. While causing pain--higher prices--is certainly one way, easing that pain by changing the way we work and play must be part of the picture. Government should give incentives to business who encourage telecommuting. City planners must consider energy expenditures when designing new development. Consider, for example, the benefits of locating a new sports arena downtown--as Washington's MCI Center (pro basketball and hockey) is--compared to the drawbacks of locating it off an interstate (Redskins football stadium). It take literally minutes for fans to get out of the MCI Center and back to their homes after a game there. They can ride cabs, take Metro, buses, walk, bicycle, or drive their own vehicles. Drivers have a multitude of routes to choose from.
After a Redskins home game, however, fans simply sit in slow moving parking lot, forced to approach the beltway from only two access points. It takes them hours just to get to the highway! Think of the millions of gallons wasted as they sit there, their engines idling. Shamefully stupid.

Education, as always, is the key. We somehow need to find a way to make it totally uncool to waste energy in any form.

Unknown said...

Even George Bush recognizes that we are addicted to oil. If we are addicted, we have to find some way to wean ourselves off our habit. As you say, the best way to do that is to tax it. Any economist will tell you that if you want less of something, you tax it, and then people will make their own decisions. They will trade in the SUVs for Priuses, they will take public transportation, they will move closer to their jobs. Whatever makes economic sense for each individual. And taxes do not hurt the economy. It really depends on what you do with the tax money. Taxes are just transferring money from some people to other people. In this case, the taxes would go from people who choose to buy a lot of gasoline to the rest of us. Whether we use that tax money to lower income tax rates, or use it to reduce the national debt, or use it on public works projects, we will all benefit by exactly the same amount that we will pay in gasoline taxes. The oil industry and the automobile industry will just have to adapt to declining use. We need to treat gasoline the way we treat cigarettes.
Tax the hell out of it, and usage will decline.