Oil Glut Offers Easy Gas Tax Hike

Gasoline prices have followed crude oil prices down in the last several weeks, and the industry analysts believe that there is more room for the petroleum complex to decline. Because of its importance to the American economy, gasoline price changes have huge effects on economic activity. High gas prices kill it off while low gas prices stimulate it. Declining gas prices offer policy makers a rare chance to raise taxes on gasoline without consumers feeling the pinch. And the revenue is more than needed.

With prices down by a dollar a gallon from last year at this time, which varies somewhat by location, drivers have more money in their pockets to spend on other (more economically useful) products. At the same time, lower prices mean that there will likely be more driving in the coming months, which in turn means more wear and tear on America’s roads. These are maintained by federal Highway Trust Fund [HTF], which has seen a revenue short fall relative to spending for 13 years in a row.

The solution is simple; it’s time to raise the federal tax on gasoline from 18.4 cents a gallon, the level set in 1993. As prices fall, there is an opportunity to capture extra revenue for the HTF. Prices should continue to fall, but at a slower rate with a higher tax rate. Consumers won’t feel the pain because they are still getting lower prices. Yet the benefits to the nation are huge.

America’s roads are in lousy shape. The American Society of Civil Engineers give them a grade of “D” overall. Their shortcomings actually cost the country $130 billion a year according to the ASCE. Steady-state maintenance, the amount needed just to stay where things are, requires $101 billion in spending per year. Genuine improvement would cost $170 billion annually. The current overall spending level of $91 billion annually on capital investments by state, federal, and local authorities just isn’t enough. Greater revenues would allow that $170 billion to become approachable and slash the $130 billion loss that the current state of roads imposes.

Moreover, lower gas prices discourage development of alternatives to petroleum fuels and conservation. Higher gas taxes will reduce the profligacy America has demonstrated in energy every time oil prices have fallen. As the late Shah of Iran said, “oil is too valuable for fuel.” There is a finite amount of it, and burning it puts carbon into the atmosphere and oceans, which undermines the stability of civilization. Moving to renewable energy is harder with falling prices, but this time, it doesn’t have to be a set back to greener economics.

Best of all, the current situation makes a gas tax hike a bargaining chip in an overall tax reform package. While a gas tax is more regressive than an income tax, falling most heavily on the rural poor, it does offer Washington deal makers a chance to cut taxes on corporations and individuals (which is the objective of every Republican in the new Congress) while retaining revenue to keep the deficit on its downward trajectory.

A final consideration in the gas tax is indexation. Since the last time the gas tax was changed, inflation has destroyed 28% of the spending power of the tax. Indexing the gas tax to inflation would prevent such an erosion. However, indexing would be inflationary itself. As prices rise, so would the cost of filling up.

An alternative might be reverse indexation, which analysts would need to consider carefully. The idea would be to reduce the tax as prices rise. This would prevent prices that consumers pay at the pump from falling quite so far, and cushion future price increases. It would require careful management at the HFT, but it is an idea worth considering.

The important thing is to act while this window is open, unlike in the 1980s.