Saturday, May 25, 2013

Gradually-increasing gas tax that's buffered against price shocks

That's the answer. The question is what's better environmentally and economically than the current situation of an inadequate gas tax and a price that swings widely.

We need to increase the gas tax, a lot, to cover the economic externalities, decrease overconsumption, accelerate the transition away from internal combustion engines, and pay for infrastructure previously paid for by gas taxes on inefficient engines. At the same time, the public hates increasing gas prices and the more environmentally responsible leaders get beat up politically every time the price goes up, more than they recover politically when the price goes back down.

I think the public would prefer predictability and less variability even if the price goes up on a gradual basis. So here's my suggested deal:  set the federal and/or state gas taxes at the wholesale level and increase them at 5% annually (or whatever set level we can get, hopefully better than the usual inflation rate). That tax increase holds, if the wholesale price of gas doesn't change. If the wholesale price drops, the tax increase goes up even more so the year-on-year change is +5%. And if the wholesale price increases, the tax increases less or even decreases to get the same net increase.

This idea stabilizes the wholesale price, not retail which will vary with other costs, but overall it should dramatically reduce variability.

The downside is that the price doesn't react to temporary price signals so it's less efficient. On the other hand, an increasing tax captures more economic externalities, making the price more efficient compared to the present. I'd say the good outweighs the bad.

Second, the revenue stream is far more variable, but overall it will be better than present.

Just an idea


Arthur said...

I've thought of running a gas tax similarly adjusted to price to reduce volatility but something more like the following: if retail gasoline before tax is $4/gallon or more, tax is a fixed amount (like the 18 c federal tax). If it's under $4 then tax is constant + 50% of difference from $4. So at $3 without tax, tax would be $0.68 for a total of $3.68. At $2 before tax, tax would be $1.18 for a total of $3.18.

But complicated formulas of that sort are probably hard to sell politically.

cce said...

Create a carbon tax that raises some predetermined percentage of GDP. The revenue collected would fluctuate based on both emissions and the size of the economy. GDP per capita grows faster than inflation so even though the tax also increases faster than inflation (thus putting an ever larger price on carbon), it would never consume more than a certain percentage of GDP, thus providing the "certainty" that the market loves so dearly.

Anonymous said...

I agree.

We should subsidize all fossil fuels because:

- CO2 fertilizes crops globally to increase yields
- CO2 reduces water consumption of plants
- CO2 increases drought tolerance of plants
- global warming increases available surface water ( through increased rainfall ) for a world which is depleting its fossil water
- global warming may reduce human mortality since mortality peaks in the cold season and troughs in the warm season

So, yes, let's subsidize all fossil fuels to increase the benefits they bring!

Barry O

Anonymous said...

The problem with a consumption tax on a common product is it impacts the poorest the most. An ever increasing tax on gasoline will not accelerate innovation in alternatives but it will swell the poor ranks and those who will need even more government services.

Ever rising taxes on gasoline will increase prices on many things such as food and all other products that are delivered.

It is a bad idea.