Arnold Kling  

Gasoline Tax

The Debate... Future of Health Insurance...

In the September American Economic Review, Ian W. H. Parry and Kenneth A. Small write,

The British government has defended high gasoline taxes on three main grounds. First, by penalizing gasoline consumption, such taxes reduce the emissions of both carbon dioxide and local air pollutants. Second, gasoline taxes raise the cost of driving and therefore indirectly reduce traffic congestion and traffic-related accidents. Third, gasoline taxes provide significant government revenue: in the UK, motor fuel revenue is nearly one-fourth as large as the entire revenue from personal income taxes

...under our benchmark parameter assumptions the optimal gasoline tax in the US is $1.01/gal (more than twice the current rate) and in the UK is $1.34/gal (less than half the current rate)

This will comfort Charles Krauthammer, who wants to raise gasoline taxes to punish the wicked Saudis and Iranians. As I pointed out in Oil Econ 101, energy conservation is a futile gesture in the war on terrorism. However, the Parry-Small paper does not assume any benefits of that sort.

From my perspective, with the Washington DC area one of the three worst regions in the country for traffic, the anti-congestion motivation for taxing gasoline is worth considering. On the other hand, I think that taxing congestion-causing behavior directly may be a better approach.

Consider the EZ pass system that collects tolls from cars automatically as they go through toll booths. Within a few years, my guess is that it would be easy to adapt this to create toll lanes on existing roads, and to adjust tolls for crowding. This sort of smart toll system might relieve congestion in a more targeted manner.

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The author at Econbrowser in a related article titled Windfall profits tax writes:

    Here's a summary of some of the recent discussion about the proposal of a tax on the windfall profits of oil producers.

    [Tracked on November 21, 2005 6:17 PM]
COMMENTS (9 to date)
spencer writes:

Technology is raising the posibility of significant changes in the system. But meanwhile gasoline taxes remain a quite effective user tax to finance roads and other structures that in turn encourage gasoline consumption.

the problem with using taxes on final products to discourage demand is that it has no impact on supply. If you want to do that, I would much prefer an import tariff. It would impact demand, but it would also raise prices for domestic suppliers and so encourage supply.

Ivan Kirigin writes:

The smart toll lane is an idea strongly pushed by Cato. Rather than high-occupancy-vehicle (HOV) lanes that remain either empty or equally congested (as it seems to me, at least), high-occupancy-toll (HOT) lanes would charge people more for use during higher congestion times. Here is a good pdf on the topic.

As for gas-taxes, my biggest complaint is the target of the revenue. If it goes to general government coffers, that creates a pretty bad incentive system for politicians to raise taxes arbitrarily, while claiming it good for the environment.

If the revenue goes towards road construction, then all of the talk of environmental benefit is gone, as there will probably be more driving when driving becomes easier and faster. Alternatively, some new roads in areas like NYC actually _increased_ congestion because the extra space was trumped by a mass of people thinking it feasible to drive to Manhattan. [NYC’s traffic problems would be solved by more expensive meter rates, and an electronic credit card system to replace quarters]

The revenue for a gasoline tax should entirely go to long-term research alternative energy for transportation. This would actually solve Oil Econ 101, in that the biggest problem with lowering US demand for oil is massive foreign demand. If alternatives were cheaper than gasoline, you wouldn't need to even subsidize them: world demand alone would bankrupt OPEC, eliminate harmful emissions, and stop all the hot air about global warming from actually warming the globe.

An example of a possible target for funding: a Battery Prize. All taxes would go to a prize fund, first winner take all. We're talking billions, very quickly. The goal: build a battery which can't explode in an accident, has twice+ the energy density of Lithium Ion, and costs half as much as lead-acid. You would have all-electric cars shortly there after.

Dan Landau writes:

The principle is straight forward, tax what you want to reduce and deregulate what you want to promote. Congestion problem? Tax road use in high traffic time periods. Energy problem? Deregulate atomic energy, you have solved the electricity problem. Still got a gasoline problem? Deregulate mercenary regime change? There are enormous unused reserves of oil in Russia, the former Soviet republics in Central Asia, Nigeria, etc. The appropriate regime change would allow American oil companies to develop them and solve your gasoline problem.

Neema writes:

Smart toll roads already exist in Southern California (Orange County, and maybe San Diego County). There's a sign alerting motorists to the current toll before entering those freeways.

augur writes:

Singapore has implemented a smart toll system known as Electronic Road Pricing, for 'arterial' roads and highways within busiest parts of the city during th peak hours of the day.

It was introduced as a usage-based taxation in 1998. I do not have accurate figures with me, but I know it has achieved about 13% drop in traffic and a 20% increase in traffic speed since. It has promoted use of alternative routes, car-pooling and travelling before or after peak hours.

So it is a very effective way to ease congestion on targetted roads. However, I am not sure if it reduces gasoline usage by alot, and I do not have any relevant numbers either. Many would choose to travel on non-peak hours or take alternative routes. So reducing the dependance on gasoline will depend on how many opted for public transport or car pooling.

For more info you can check the following links:
Kitakyushu Initiative for a Clean Environment: Successful and Transferable Practices

Ivan Kirigin writes:


Vehicles are more efficient at certain speeds. You could save gas just by having every car operate at these speeds for a high percetange of operating time.

So having vehicles travel faster, with the same number of miles travelled, would decrease fuel usage, unless they are driving faster than the most efficient speed.

Robert Schwartz writes:

It is an interesting paper, but I think it misses a point. We (the USA) are now involved in our 2nd war in an oil producing country in the last 15 years. (I think the war was just, proper, and expeditious, but that is neither here nor there for this purpose.) Even if we do not fight another war in an oil producing country anytime soon, we will have to maintain an extensive military capacity, because the world will still have many troubled oil producing countries, whose internal problems may boil-over. Check out what is going on in Venezuela and in Nigeria for two examples.

Wars are expensive. the current one has an operating cost of at least $10^11/yr. A gasoline tax is, to me, a good first approximation of a relevant revenue stream that can defray the military expense. Since the US uses about 10^11 gallons of gasoline a year, an additional $1 a gallon should cover the cash cost of the war. I can easily argue for a $1.50 on the grounds that the war is depleting our stock of military capital equipment and obligating us for future costs, such as Veterans' benefits that should also be defrayed.

I therefore believe that the gasoline tax should be increased to $2.50/gal.

bernie writes:

I fear that Charles Krauthammer is an idiot. Luckily the rest of us are on the planet to prevent his stupidity from casuing him harm.

dearieme writes:

Small technical point: are all relevant people aware that our gallon is bigger than yours?

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