Got Gas Pain? Try This Tax Pill.

vintage gasoline pumps

Image by Muffet via Flickr

In today’s Joplin Globe (5/8/11) guest columnist Don Ray  voices complaints about gasoline prices that is sure to resonate with readers.  The price per gallon is almost $4 and there are no projections in sight for anything less than about $3.50 anytime this year.  It is causing not only pain at the pump for consumers, but raising the transportation costs of everything from food to airfare.

Seeking a solution, Mr. Ray wrote to the president and was disappointed but not surprised to receive a “canned” letter in reply.  Having no button on the Oval Office desk for decreasing gas prices, the president suggests a comprehensive plan to embrace green technologies while at the same time setting standards for increasing vehicle fuel efficiency.  This was unsatisfying to Mr. Ray who accuses “this green loving president”

of wanting “. . . to cripple the power generating capabilities of this country by making it impossible to produce the power we need at a cost we can afford . . . ”

Instead of the president’s approach, Mr. Ray suggests

“. . . putting a moratorium on what the EPA is doing in various areas . . . ” and restricting “. . . trading and speculation on oil to only legitimate companies . . . ,not hedge funds . . . “

He would also send the Justice Department after “speculators” and increase domestic oil drilling and refinery production.  Oh, and he would also bring back the double-nickel speed limits.  And finally, he recommends eliminating federal subsidies for big oil.  That’s one I agree with, although I’m not sure how it helps the price at the pump – it could even increase it.

I believe there are two ways to look at this, the long-term way and the short-term way.

After Hours in a Gasoline Line a Driver Could ...

'70's Gasoline Line, The U.S. National Archives via Flickr

For the short-term way, I submit that there is no good solution.  There really is no way to “outlaw” price speculation and still have free markets.  President Nixon famously tried price controls for gasoline in 1973-74 with disastrous results:

“The American Automobile Association reported that in the last week of February 1974, 20% of American gasoline stations had no fuel at all.”

As for putting a moratorium on EPA activities, what that sounds like is ignoring the health effects of pollutants on air quality and inviting more oil spills like last year’s in the Gulf, the effects of which will be with us for a long time.  Meanwhile, health problems like asthma are accelerating and are likely linked to environmental contaminants.  No, “drill, baby drill” might lower the cost a few cents a gallon but it’s not going to solve the long-term problem.

The long-term problem of course is that we import more than half of our oil, and because of that, expose ourselves to extortion by OPEC.  (And many of those dollars get spent on terrorism – that’s where Osama bin Laden got his.)  We could start switching to natural gas, abundant supplies of which have recently become recoverable through the process of “fracking” (high-pressure hydraulic treatment of horizontal drill channels), but that has been shown to often cause contamination of the water table.  Mr. Ray might be in favor of having the EPA ignore that, but count me as firmly against it.  Clean water is essential to life as we know it and it is getting more scarce every year as national aquifers drop.

No, the long-term solution to weaning ourselves off foreign dependence is to man-up to the problem:  start using less oil, drive smaller vehicles, embrace alternate (yes, green) energy sources, and continue to protect the environment.  Hmm.  That sounds a lot like the president’s plan to me.  Fancy that.

These wild swings of gasoline prices are a big problem.  People eventually adjust, but the change is painful – the variability might be more of a problem than the actual price it seems to me.  Price swings are hard on the economy and they hurt everybody who drives or shops.  I have often wondered if it wouldn’t be smart to levy an additional federal tax on gasoline, a variable tax that would keep the price of gasoline at the pumps at about the same level all the time.  Such a tax would rise when the price of oil on global markets falls, and it would diminish when oil went up.

I would like to hear from economists about whether such a variable tax might work, because I am a great fan of the hidden hand of the market.  Prices do more for real economic action than all the lip-flapping and industry-regulation in the world.  (Think CAFE standards for vehicle manufacturers.)

A photo of a Ford Focus RS

Image via Wikipedia

Finally, Mr. Ray criticizes the president for using SUV’s for his travels.  Sorry but that sounds niggling.  While I agree that symbolism is important, surely security concerns for top officials really ought to take precedence.  I hope Mr. Ray might reconsider on this point.  Who knows, eventually the president might be a Republican again.  Do you know any Republicans who would deign to tour in a column of Ford Focuses?  (Foci?)

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About Jim Wheeler

U. S. Naval Academy, BS, Engineering, 1959; Naval line officer and submariner, 1959 -1981, Commander, USN; The George Washington U., MSA, Management Eng.; Aerospace Engineer, 1981-1999; Resident Gadfly, 1999 - present. Political affiliation: Independent, tending progressive as the GOP recedes from its Eisenhower roots.
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14 Responses to Got Gas Pain? Try This Tax Pill.

  1. ansonburlingame says:

    Jim,

    Oil is a commidity. When any commodity becomes scarce or people think it will become scarce the price goes up. When the price goes up people CAN limit their use of the commodity and the price goes back down. Supply and demand.

    EXCEPT in the of oil for transportation no one wants to “cut back”. Americans have their assumed life style that prohibits anyone from “getting the car and going for a spin”. That is NOT the American “way”. But it sure is all over Europe, for example where “petrol” sells for about $10 per gal.

    Other than writing letters to the President Americans have two choice with rising gas prices. Cut back on driving so many miles per month or year and/or trade in the guzzler and get a high milage automobile. If you cut your miles driven in half you cut your fuel costs in half. Double the miles per gallon on your car and your costs are cut in half.

    When gas prices go up the only choice (other than paying more out of ones budget for driving) is to cut the miles or boost the milage. The President cannot control to any degree the price at the pump. “Drill baby drill” is pure politics. And for sure increasing regulatory controls over pump head or refinery operations will drive the price up. And as you noted, removing current subsidies to “big oil” (which I too support) also will drive prices up.

    Americans are upset with gas at $4 a gal today, up about a buck or so over the last year. And such increases COULD be a big cause for Obama not to be reelected.

    Well I hope he is not reelected but I don’t blame him for high gas prices. Gas prices are high because Americans are too selfish to limit their driving or get smaller cars. Imagine telling some ….. around Joplin not to buy a big pickup truck to drive to work!!

    Such gas prices are inevitable as the value of the dollar goes down and the value of the dollar WILL continue to go down until we get control of debt and deficits. And THAT is why I hope Obama in not reelected (not that I have much faith in Reps in that regard either).

    As the “noose” of gas prices tightens around all of our necks, just imagine when other things start going haywire and debt and deficit solutions remain stalemated. Food, shelter, transportation, health care, you name it will eventually go through the roof.

    And then as we slide over the “cliff” eveyone will ask why?? Gas prices this time around are NOT BEING driven by OPEC (al la the Carter years). Gas prices are being driven by the continued economic turmoil in America and our colletive unwillingness to get our economic act together, at least in my view.

    How is that for a “tip of the iceberg” analysis.

    Anson

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    • Jim Wheeler says:

      Not bad, Anson. I only have one nit to pick on your comment here. You said,

      Gas prices are being driven by the continued economic turmoil in America and our colletive unwillingness to get our economic act together, at least in my view.

      Our unwillingness to act, yes, but not “economic turmoil” as a cause of the problem. As Hans Rosling showed in his “US in a Converging World” dynamic map, the poorer countries continue to catch up to the First World economically, China and India chief among them, and it is that ever-increasing energy demand that will force us to change our habits. Of course, as you perhaps meant, the price of gas won’t matter much if our currency becomes worthless because of the “economic turmoil”.

      I’m a little disappointed you didn’t comment on the variable tax idea, but then it’s the same old problem – voters don’t want to hear “raise taxes”. They don’t want to hear “change Medicare” either, so both parties have apparently agreed to put off dealing with it until after the 2012 election. Same old, same old.

      Jim

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  2. ansonburlingame says:

    Jim,

    I should offer my views on the “variable tax”. First I do not trust government to manage such a scheme. Sure they will raise taxes. But when it comes time to lower them, I doubt it. Some new “vital need” will come up and there we are again.

    Cap and trade is concept makes sense to me. But again it is trust in government to manage it. Raise taxes on fossil fuels to “make” new technology (or even nuclear) more attractive from a cost standpoint. Use that “extra” tax money to fund the new technologies to bring them to market sooner as well.

    Just watch “Oklahoma oil”. It costs too much for a lot of pump jacks to operate until oil reaches “$X” per barrel. When that happens they turn on the pump jacks and make money (and get accused of being “greedy” big oil in doing so). When the market adjusts and oil prices go down (OPEC increases its supply) then they turn off the pump jacks again. Janet introduced me to an old time OK oiler and he explained that scenario on some detail to me not too long ago.

    Micro managing prices in any market through government controls makes me VERY sceptical. But I do trust markets to do so. The problem when that happens is then the screams of inequality in income distribution when that happens, in my view.

    One last rebuttal concerning “economic turmoil”. Yes emerging nations and a flat world affect to some degree our own economic conditions. But the “turmoil” in the U. S. is driven by our unwillingness to change our life styles to meet new world wide conditions. Driving fewer miles with smaller cars is just a simple example or our unwillingness or inability to make such changes.

    Then go tell someone they cannot fill in an oceanside “swamp” to build homes out of concerns for rising sea levels caused by global warming concerns. Holy Cow!

    Anson

    Anson.

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    • Jim Wheeler says:

      Exactly, Anson. We are close to agreement here.

      If that’s your problem with the variable tax, there is an easy fix for it. it would be automatic. That it, it would be linked, both up and down, to a market index just like cost of living increases (COLA’s), and those work just dandy – have for years. You could have it occur whenever, say, a 60-day running index average tripped a certain value, or even based on a monthly or semi-monthly snapshot of the running average. AUTOMATIC. Hands off, Congress!

      You are certainly right about human nature – we agree there. As for building houses in dangerous places, it has been going on for a long time and is likely to continue. Building houses in flood plains and on beaches prone to hurricanes is strictly the fault of Congress buckling under the awesome financial pressure from the Insurance and Building industries, IMO. It primarily benefits the vacation houses of the rich and it is a scandal. But as far as global warming goes, it’s pretty far down the road. What we need now is to smooth out these pesky yo-yo’ing prices at the pump.

      Jim

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  3. ansonburlingame says:

    One last point to emphasize my distrust of govenment regarding the variable tax (ANY government whether Dem or Rep for sure)

    I like your suggestion to force by law the tax to indeed be variable. But two points. Government is fully capable of “tinkering” with the indices that would trigger automatic changes. Recall that food and gas is no longer included in calculating “inflation”. Wonder why that is the case????

    Second even if tax collection is made variable, how the collected money is used can always be “adjusted” by later political “slieths of hand”.

    Anson

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    • Jim Wheeler says:

      Your paranoia is showing, Anson. It is certainly true that all money is fungible – always has been. That’s why making budgets is like making sausage. Fortunately we have transparency in our representative democracy through freedom of the press. Also, there are several “kinds” of inflation, but just because one is cited doesn’t keep us from looking up the other. I submit that distrust of politicians is no reason not to collect revenue. Government is necessary for many functions and it can’t run on fumes. Meanwhile, the infrastructure crumbles and the cliff looms.

      Jim

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  4. Jim,

    You know I can find a lot to agree with here, but I especially like the succinct way you put the solution to the oil problem: “…start using less oil, drive smaller vehicles, embrace alternate (yes, green) energy sources, and continue to protect the environment.”

    I don’t understand why that is so controversial among our Republican friends, but apparently it is.

    And I would have to think a lot more about your variable tax idea. My first reaction to a tax on fuel is that it is severely regressive. And I’m not sure how it would work, to be honest. Let’s say gas averaged a dollar a gallon and the tax was set at twenty-five percent, which would mean it would cost $1.25. Then what happens when the price of gas goes up to, say, two dollars and stays there? What good would the tax be?

    Duane

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    • Jim Wheeler says:

      Try this example, Duane.

      Let’s say gas is $3.75 a gallon. Phase in the variable tax at, say, $0.10 per gallon per month until the total of the tax and the60-day running average (non-tax component), “A”, was such that the price at the pump was, say, $4.75 per gallon. That then amounts to $1.00 per gallon in tax.

      Now, the variable tax base amount is established at $4.75.

      Then, let’s say that a month later, “A” fell such that the price at the pump fell a quarter to $3.50 per gallon. At that point the variable tax would be raiseed to $1.25 per gallon, thus maintaining the price at the pump at about $4.75.

      The reverse would occur if the market index were to rise, resulting in a lower tax, but the price at the pump would remain near $4.75.

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  5. Jim Wheeler says:

    PS, as to Duane’s second objection,

    I agree that the tax would be somewhat regressive, but it has the virtue of taxing the users of the product, and that of course includes businesses and the transportation industries. Although Anson will correctly point out that the tax income is fungible, one could still lobby for the revenues to be used to maintain the infrastructure (roads) and promote alternative energy sources. I say, any time you can link revenues to wear and tear, you are assisting the “hidden hand of the market”. It is exactly such a disconnect that has gotten us into such a bind in healthcare – a massive government subsidy (Medicare) that masks true costs.

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    • Jim,

      Okay, I understand how it would work up to the limit. But what if the limit were exceeded? The revenue raised would be zero. You seem to be saying originally that this variable tax would be merely a “additional federal tax,” and not one dedicated to raise revenues for necessary expenses. But you know the money raised by the tax would soon be spent, and if the revenue then fell to zero, a deficit results. How do you get around that? You said in your last comment that the money could “be used to maintain the infrastructure (roads) and promote alternative energy sources.” If the money dries up because of an increase in gas prices beyond the limit, what then?

      And although I have some sympathy for your idea, I still can’t overcome the regressive nature of the tax. Nearly everyone depends on a car to get to work in non-urban areas, and a large tax would be too burdensome on some of them. These folks already spend all of their money and diverting some of it to higher gasoline taxes would be a problem. If there was a way to overcome this, I might be a convert.

      Duane

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      • Jim Wheeler says:

        Duane,

        Note that “A” is the 60-day running average (non-tax component) for the index of gasoline prices. I propose that that be sampled and adjusted at specified intervals, maybe every two months. Thus the $4.75 base in my example would float according to the market and the variable tax would remain at about the same ratio to the total price.

        While this might sound alarming, remember that the overall effect of this variable tax on the world’s largest consumer of gasoline (U.S.) should be to diminish gasoline consumption and cause people to embrace alternatives, such as has happened in every price spike so far.

        As far as the regressive nature of the tax goes, I can only say that it feels right to have an amount of tax on an activity that is proportional to the infrastructure required to support it.

        Jim

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  6. ansonburlingame says:

    To both,

    TRUE COST. Now I wonder what that might be? Could the true cost of health care today be the cost of health care private insurance? Certainly it is not what Medicare or Medicade pays. Could it be the cost if I went to a doctor or hospital and simply paid my own bill? Nope, not there either.

    Is it possible that in a truly capitalistic society it is the cost of goods and services without payment by insurance (too much profit) or government (artifical lower costs).

    Even a car is not the true cost perhaps with all the government requirements laid on the manufacturer. But I agree government must regulate some things so perhaps the “true” cost is what I pay after all the neotiations are completed. Same with house.

    But specifically in the fuel tax issue above, “true” cost is different from TRUE cost it would seem. True cost to me seems like it should be whatever the market will bear.

    Anson

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    • Jim Wheeler says:

      I agree with your simple example, Anson. That is why I have lobbied in these pages for some kind of system that would inspire patients to care about prices enough to shop for medical care in all its parts. As you know I have advocated the concierge model in which the patient has financial skin in the game.

      Jim

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  7. Jim Wheeler says:

    FYI, to Anyone Interested,

    An additional tax of $0.25/gallon on gasoline (diesel excluded) would bring in revenues of $35 Billion. In 2004, according to Answers.com, Americans used 140 B gallons of gas. Link: http://wiki.answers.com/Q/How_many_gallons_of_gas_does_america_use_a_year

    140 B gallons/year X $0.25/gallon = $35 B

    Like

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