Tomorrow the President’s deficit reduction commission is due to vote on whether to approve its recommendations on reducing the deficit.
This is an issue that as a nation, we are practiced in avoiding. Already the various interest groups are spooling up to pick apart the proposals.
I haven’t studied the entire set of recommendations, but have to admit to being pleasantly surprised. This is a well thought out, credible set of ideas. Judging from the squeals from all sides, I would say the proposals do a good job of spreading the pain. More soberly, they represent just a start. Our deficit problems get only worse as the years progress and even if the commission’s plan is fully adopted, the annual deficit is only reduced. There is still more to be done.
There is one area where I think the commission could have been bolder. There is a recommendation to increase the federal tax of gasoline, in stages, by $0.15/gallon. If our only concern is to raise revenue, this is fine. But the commission has already set its sights higher. Their ideas around simplifying the tax code and reducing rates are a welcome attempt to spur economic growth.
Why not raise our sights higher still? As a nation we have struggled to develop a coherent energy policy. We have CAFE standards, guzzler taxes on some vehicles, tax credits on others and subsidies for renewable fuels. These are politically palatable because they are based on the fiction that solutions can be effective even when they are largely invisible to consumers. (AKA the voters.)
But it’s nonsensical in a market-based economy to largely ignore the market. Consider CAFE, for example. The idea behind CAFE is to force car companies to improve the fuel efficiencies of their offerings. (But it does nothing to ensure consumers will actually buy these vehicles.) CAFE seems simple, and if the mandates could be achieved with vehicles that offered the same utility, features and pricing of their less efficient precedents, there would be no issue.
Of course, that is rarely the case. Fuel efficiency involves trade-offs, typically less performance, smaller vehicles, and/or higher prices. So despite the recent focus on fuel efficiencies — and the headlines garnered by vehicles like the Chevy Volt and Nissan Leaf — the best selling vehicles in America today are full sized trucks and SUVs.
Worse, when CAFE standards shoot up, as they did in the 1970s, car companies lack the technology to keep up. Sure, one way or another, they will meet the mandate—but history has shown that some truly awful vehicles have been foisted on the market as a result. It is not much of a stretch to argue that GM, Ford and Chrysler are still trying to move past the reputational damage caused by this generation of vehicles.
Netting things out, a comprehensive energy strategy needs a market component. And the simplest way to align market demand with a supply of fuel-efficient vehicles is through a meaningful gas tax. If people know that they will have to spend significantly more on fuel, they often choose to buy more fuel-efficient vehicles. It is just that simple.
Taxing gas an additional $0.15 is a missed opportunity. We have seen that to move demand, gas prices need to climb much higher. Raising the price by $2 per gallon seems about right. (Ironically, as technology progresses and fuel economy improves, sensitivity to increases is lessened. The price increases need to be higher to have the same effect.)
This increase should be phased in over a period of years. It is the certainty of higher prices that will shift today’s demand as much as the higher prices themselves. This would allow consumers to blunt the fiscal impact of higher fuel prices. Furthermore, a mechanism could be set in place whereby the tax would vary within a range designed to stabilize the retail price of gas. Massive swings in the price of gas wreak havoc on car companies’ production planning. Some stability could be worth billions to automakers. (Perhaps avoiding future bankruptcies…)
The biggest issue with a gas tax is that it would raise lots of money. I would be one of the last people to argue that our government has shown enough respect for the taxpayer’s dollars to warrant a new flood of money. This is why the approach favored by the deficit reduction commission affords this moment of opportunity. The funds raised by a gas tax increase must be offset by tax reductions in other areas. The overall impact could be a net positive. An increase in the gas tax produces positive outcomes—conversation of a strategically volatile, non-renewable, polluting resource. Tax reductions on income would encourage labor and employment.
A final criticism of a higher gas tax is that it is “regressive.” True enough—as are a myriad of other taxes. As pointed out previously, one outcome is that consumers can see relief from the tax through reducing unnecessary driving and/or purchasing more fuel-efficient vehicles. Lower-income individuals who may not be able to do either can be offered relief through income tax credits or other mechanisms.
Many are saying (hoping?) the commission's proposals do not survive the vote to be recommended—let alone get a serious hearing in Congress. Admittedly this is a likely outcome.
Already, as we have raised the idea of a gas tax, we have seen angry responses—arguing presumably for a continuation of the status quo.
But come on. As a nation we have grown accustomed to spending money we do not have. The dollar’s unique position as a safe haven currency means we have been buffered from the usual consequences of our recklessness. Are people really suggesting this can continue? Or that solutions are on offer that involve no hard choices?
The commission’s recommendations are worthy of serious debate. The debate should include a consideration of a meaningful increase of the federal gas tax. If anyone has a better set of ideas, I for one would welcome the discussion.