Thursday, January 1, 2009

Krauthammer's Zero Sum Gas Tax

Over at Postcards a few days ago, he blogged a bit about Charles Krauthammer's idea in the latest Weekly Standard called a "Net Zero" gas tax.

This is an interesting idea. Essentially, the tax would be an immediate $1 per gallon surcharge on the existing federal gas tax. This would (in theory) drive down demand (for a given supply, a rise in price will create a decrease in demand). Lots of important goals involved in driving down our demand for oil, and raising the tax has been brought up before. Where Krauthammer comes through with a practical and conservative idea is that each dollar collected through the gas tax would be offset by a concomitant decrease in the payroll tax (the tax that ALL working people pay, as opposed to the income tax, which is escaped by nearly 40% of all American workers). The idea goes like this...since the average American uses 14 gallons of fuel a week, the payroll tax would be decreased by $14 per week for EVERY American worker. In theory then, the extra $14 paid at the pump is a wash.

A couple of things. This sounds good, and the revenue neutral nature of it is wonderful. I think the shock of a dollar a gallon increase WOULD drive down demand, and I think all of the wonderful things Krauthammer claims will happen (actually, a dollar may not be enough, but Krauthammer thinks it is about all that could be politically palatable. The hit in the payroll tax would be immediately made up for (revenue wise) by the added gas tax. Everything sounds really, really good about this. But there are a few warts in it.

The first is the obvious hit that folks in the travel and tourism industry would take if people drove less (the impact of the higher gas tax). Krauthammer would argue that the extra dollars they have in their pockets COULD go to pay for fuel if they were motivated to travel. But it probably wouldn't.

The second thing not discussed here came up in a chat with the Kitten, who saw the issue a little differently. As Krauthammer discusses, this tax hike is designed to punish people who drive more....especially those who drive more than 14 gallons a week. Folks who live in cities or suburbs, where all the things you need are located quite close-by, where mass transit options exist, where many people do not even consider OWNING a car...really get a good deal here. Folks who live in rural America who drive 30 miles to the closest Wallmart and who really LIVE by their cars--they are going to suffer. Kitten sees this as a fairness issue. I agree, but as Krauthammer points out, we screw one group of people over others on tax policies aimed at encouraging behavior all the time (tuition tax credits favor folks who go to school over those who don't, don't even get me started on how single people get screwed in the tax code).

I see it less as a fairness issue and more as an a source of political friction that the oh so urban and urbane Krauthammer isn't thinking about. This sets up a classic "country-mouse/city mouse" set up, where rural America thinks they're getting screwed by the already pampered (transportation-wise) sector of the country living in and around cities.

I find myself thinking this is a pretty good plan, and I drive more than 14 gallons a week. I think it wouldn't be a very smooth path to passage in a Congress sometimes beholden to its rural interests (see the annual Farm Bill), but I think it is worth trying.

6 comments:

Dan said...

OPEC could actually win with this. Let's say that a $1.50 gas tax is imposed and gas is now at $3.00/gal. OPEC decides to limit production, subsequently driving-up the cost of a barrel of oil where gas is now $4.50/gal. Consumers are pissed off at high gas prices and immediately call for a repeal of the gas tax, since that is the only sure way to bring down gas prices. The December '08 lows of $1.45/gal will still be fresh in everyone's memory. Add to that the subsequent increased prices for goods (Krauthammer's article never mentions the impact on consumer goods that increased gas prices have). Now, the $14 doesn't seem to go as far. With this self-imposed gas tax, I think the US public would be clamoring for a repeal, since that would be a way to keep gas prices low, and not require us to change our driving habits. Not sure if we're willing to change our driving habits if we know that a tax repeal would provide the same cure. OPEC might take it in the shorts initially, but it would allow them to eventually take the initiative back on pricing.

Sheralle said...

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Mudge said...

Dan - Good thinking. I see another pitfall. Washington gets used to the idea of $1.50/gal gas tax while already being used to payroll taxes. Democratic congress decides they are still not able to fund their nationalized health care program or their next tax "rebate" to people who never paid taxes and the deal about zero sum goes by the wayside. This becomes that first hit of crack to the tax addicts in Washington and we end up with both taxes.

The Conservative Wahoo said...

Dan, Mudge--couple of things.

1. If a gas tax were imposed, demand would go down. Prices would then also go down and would only halt their slide when supply is cut back. Raising prices would FURTHER reduce demand, and OPEC's total revenue would plumment. What you suggest makes no economic sense for them. Doesn't mean they won't do it, just that it cuts their own throats.

2. Mudge's reservations are spot on, I think.

The Conservative Wahoo said...

Sorry--"plummet", not "plumment".

Dan said...

I assert that Americans will not want to drive less. "Make me change my driving habits, or get rid of that tax, Mr. Politician?" Far easier for the average American to bitch about a tax levied than to alter his/her American-given right to drive. And politicians will bow to the pressure. One only needs to look at McCain and Hillary's desire to repeal the gas tax during their campaigns. It is bad enough that nobody fully understands the elasticity of gas pricing, but when we understand that the government raised the price by $1.50, well, the American public will want the government to affect at least that part of pricing to bring down fuel costs.

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