Tuesday, October 25, 2005

A Balanced Tax?

As gas prices retreat from the highs triggered by the two hurricanes, I expect to hear more suggestions along the lines of yesterday's New York Times editorial. It proposed a new gasoline tax that would keep prices at close to current levels, even after the underlying commodity price drops sufficiently to return gas to $2 or less, whenever that might be. While I give the Times credit for recognizing the regressive nature of gas taxes, even at the modest current level of 18 cents per gallon (Federal,) their reasoning includes two very shaky bits of economics, as well as a practical impediment that appears insurmountable, today.

First, consider the potential for this kind of tax to distort the economy. You can't tax gasoline without taxing diesel fuel, unless you want to promote a dramatic shift towards diesel cars, such as Europe is experiencing. And once you tax diesel, affecting short- and long-haul trucking costs, you're tweaking the entire supply chain for just about everything used in our homes, offices and factories. However, unless you were to tax jet fuel at a comparable level--thereby kicking the nearly-dead dog of US airlines even harder--you will also induce some odd shifts from trucking to air freight, and stretch our creaky passenger air transport system even further.

Ultimately, it makes little sense to tax one kind of energy and not all kinds, in proportion to their import sensitivity, impact on the environment, or some other consistent, logical basis. That, by the way, is precisely what a carbon tax does, and it would make more sense than a simple gas tax, though there are even better alternatives available, including emissions trading systems.

The Times also asserts that gas taxes create incentives for companies to invest in alternative energy. In fact, the opposite is true, because a high gas tax would reduce gasoline demand, putting downward pressure on its wholesale (pre-tax) price, and thereby on the price of crude oil. Thus, higher gas taxes would drive crude oil prices lower, reducing the attractiveness of any form of alternative energy that competes with oil on any level.

The final implausibility is that a tax like this could be approved without a revolutionary change in US politics. Despite growing concern among conservative members of Congress about energy security and the connection between energy and the War on Terror, it's hard to imagine the present Congress or administration passing a brand new tax. On a more basic level, the American public doesn't like expensive gasoline. One would have to be truly oblivious to have missed the vivid display of that dislike over the last several months. Our complex energy problems are not amenable to simple solutions, particularly ones lacking a wide base of public support.

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