Raising Fuel Taxes

At the same time that I was writing about the demand response to higher fuel prices on Tuesday, a Congressionally-appointed commission was meeting in Washington to propose an increase in the gasoline tax that would raise those prices further, in order to maintain the nation's highways. Last summer's bridge collapse in Minneapolis delivered a warning about the condition of America's road infrastructure. Without an increase in the federal highway budget, and in the 18.4 cent per gallon federal gasoline tax that funds it, the situation will get worse. This proposal will test our attitude towards a tax that has long been regarded as untouchable. It will also have implications for the US response to climate change.

Every year that goes by without an increase in the road tax, the purchasing power of the revenue it generates shrinks. If the new 35 mpg CAFE standard succeeds in reducing fuel consumption, then that tax revenue will begin to decline in nominal terms, as well. The recommendation of the National Surface Transportation Policy and Revenue Study Commission for a series of annual 5 cent-per-gallon tax increases suggests that we will be in catch-up mode for some time. But without diminishing the important safety concerns underlying the commission's work, the road tax is the tip of the iceberg. The necessity of reducing greenhouse gas emissions from the transportation sector makes it likely that some form of additional fuel taxation, either directly, in the form of a carbon tax, or indirectly, through a cap-and-trade system, will be a key component of national climate change policy within a few years.

As a new study from the Congressional Budget Office confirms, higher fuel prices stimulate changes in driving behavior and habits, along with consumer preferences for more efficient cars. Considering the amount by which we must reduce emissions over the next several decades, and the changes in consumption necessary to achieve those reductions, this will take a lot more than an extra 5 or 10 cents per gallon, on top of what is required to bring the highway trust fund back into the black. If the cost of CO2 credits under a greenhouse gas cap-and-trade plan reaches $20 or $30/ton, then in fairly short order consumers would see gasoline prices rise by 20 or 30 cents per gallon, dictated by the simple chemistry of hydrocarbon combustion and the increase in producers' costs. Depending on the severity of cuts desired, $100/ton--or $1.00/gallon--is possible.

None of this will be easy. Even without predictable opposition from groups that object to higher taxes of any stripe--a position to which I'm normally sympathetic--it will not be popular to tell Americans who have already seen retail gasoline prices double in the last four years and triple in the last ten that they still aren't paying enough. The burden will fall disproportionately on lower-income folks, and that will complicate both the politics and implementation. Throw in a looming recession, and the obstacles become formidable. Nevertheless, if we want to keep our roads and bridges in good repair, improve our energy security, and reduce greenhouse gas emissions, higher motor fuel taxes now seem unavoidable.