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Would a Gas Tax Hike Save Detroit?

Image has not been found. URL: /wp-content/uploads/2008/12/gas-station-ilmungo.jpgFlickr: ilmungo

As the nation’s automakers near collapse, global temperatures rise, and consumers and government wallow in debt, there might be a one-stop remedy for all three: raise the gas tax.

The chief boosters of the idea are not Washington policymakers. Instead, they are some of the nation’s top economists, environmentalists and newspaper editorial boards.


Illustration by: Matt Mahurin

Here’s their argument: Hiking the federal gas tax, which hasn’t changed in 15 years, would not only encourage consumers to drive less and buy higher-mileage cars — thus reducing pollution and slowing climate change — it would also nudge Detroit’s automakers to produce the vehicles, thereby making them more competitive.

Despite the recession, proponents say the time is right for Congress to hike the 18.4-cent federal tax because fuel prices are lower — at a national average of $1.68 a gallon for regular gas — than they’ve been in months. If lawmakers don’t act, they worry, consumers might again be tempted to buy — and automakers produce — the gas guzzlers that largely contributed to the industry’s current economic troubles.

“Let’s not let lower oil prices permanently filter through to consumers,” Robert J. Samuelson, long-time business columnist at the Washington Post, wrote recently. “We’ve seen this movie before.”

Gas prices have been on a roller coaster this year. They skyrocketed over the summer, peaking in July when the national average hit $4.11 a gallon. Consumers fled the large-vehicle market in favor of smaller, higher-mileage cars. Unsold trucks and SUVs, which had been so popular for a decade, started filling up dealers’ lots.

Falling gas prices could change all that, and the Big Three automakers might start churning out SUVs again if consumer demand for them picks up.

“If the price of gasoline sinks and stays at a buck and a half a gallon,” Peter Morici, an economist at the University of Maryland, told the House Select Committee for Energy Independence and Global Warming this week, “all of a sudden those big pickup trucks start looking good again and [the automakers] can make a lot of money.”

Morici did not respond to requests for comment about raising the gas tax.

The federal gas tax hike was last raised in 1993, and it wasn’t easy. No Republicans supported the per-gallon increase of 4.3 cents, one of the revenue raisers that President Bill Clinton pushed as a way to balance the budget. The bill passed only after Vice President Al Gore voted yes to break a tie in the Senate.

Ian Parry, an economist at Resources for the Future, said today’s gas taxes, federal and state, add an average of 40 cents to the cost of a gallon of gasoline. The levies “don’t reflect the societal costs of driving,” Parry says, because the expenses associated with congestion, pollution and accidents are simply ignored. “Regardless of the price of oil,” he said, “these externalities are not considered [in the tax].” Parry suggested a combined state and federal tax of at least $1 to make up the difference.

A hike in the gas tax faces a big obstacle. Appearing on “Meet the Press” on Sunday, President-elect Barack Obama rejected the idea because the middle of a recession is no time to take more money out of consumers’ pockets.

“Yes, gas prices have gone down,” Obama said. “But, in the meantime, maybe somebody in the family has lost their job. In the meantime, their housing values have plummeted. In the meantime, maybe their hours [at work] have been cut back. Or if they’re a small-business owner, their sales have gone down 50, 60, 70 percent. So putting additional burdens on American families right now, I think, is a mistake.”

Supporters of the new tax, however, say there are ways to lighten the burden. Samuelson, for example, suggested a one-penny increase per month spread over the next 48 months. That would allow consumers to take advantage of lower gas prices during the economic downturn, “but they’d also be on notice that prices won’t permanently stay down.”

Beside Samuelson, economist and New York Times columnist Paul Krugman has called for higher gas taxes. And this week, editorials in the Washington Post and the Christian Science Monitor urged Congress to raise the levy.

The debate arrives as Congress haggles over legislation to rescue Detroit’s automakers from potential bankruptcy. Some lawmakers wanted new fuel-efficiency standards to be a condition of the bailout, but that idea didn’t survive initial negotiations.

Nor did language, backed by Democrats, that would have prevented automakers from using bailout money to join lawsuits against states proposing tighter restrictions on tailpipe emissions. The provision was cut from the final version of the House bill after the White House balked.

Most Republicans oppose states’ efforts to curb greenhouse-gas emissions because they would impose an undue burden on the automakers at a time when they can least afford it. “That flies in the face of logic under the circumstances,” Alabama Rep. Spencer Bachus, the highest-ranking Republican on the Financial Services Committee, said Wednesday.

Given the political environment, supporters of a higher gas tax say there’s little wonder the idea hasn’t gone anywhere. “It’s smart policy,” said Daniel Becker, head of the Safe Climate Campaign. “It’s not great politics right now.”

Even some Democrats with long records of backing stiffer fuel-economy standards oppose raising the gas tax. Rep. Edward Markey (D-Mass.), who chairs the House committee on energy indepence and global warming, had proposed this week that the Detroit bailout include new emission standards proposed by many states. Markey sponsored the law, passed last December, that increased mileage standards, called CAFE, from 25 to 35 miles a gallon by 2020.

Markey spokesman Jeff Sharp said that the Massachusetts congressman thinks that higher mileage standards — not a higher gas tax — “is the best direction” to go.

“Better fuel economy will lower consumption regardless of the price of gas,” Sharp wrote in an email, “and put more people to work building the green cars of the future.”

Yet a 2004 report from the Congressional Budget Office found that a 46-cent increase in the federal gas tax would cut fuel use faster than increasing CAFE rules. “A gasoline tax is a good policy to compare with CAFE standards because it is the most direct way to reduce gasoline consumption,” the report stated.

Gilbert E. Metcalf, an economist at Tufts University, thinks an incremental tax on oil, when prices range between $40 and $120 a barrel, would do more to cut the country’s overall reliance on oil than a higher gas tax. (At $40 a barrel, the tax would be $40, while at $120, it would be zero.) Metcalf says such a taxation system would send “the right price signal” to encourage Detroit’s automakers to make high-mileage cars.

This woud be preferrable to a gas tax hike because “30 percent of oil is used for non-transport purposes,” Metcalf wrote in an email. “It keeps the focus on our desire to reduce oil consumption.

Whatever the plan, it will have to wait until at least next year. The House on Wednesday passed its Detroit bailout bill, which would provide $14 billion in emergency “bridge loans” to Chrysler and General Motors. Ford says it has enough cash to survive 2009, unless the economy tanks further.) The Senate is expected to vote on the bill later this week, though Republican opposition could kill the bailout.

Meanwhile, gas tax supporters are under no illusions about their minority status. “There’s not a very long line [of gas-tax proponents],” said Becker, of the Safe Climate Campaign. “We could meet in a phone booth.”

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