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2009 Transportation Bill

Would Real Men Tax Gas? A Test for Tom Friedman

On Monday, Elana Schor highlighted a recent column from occasionally right New York Times columnist Tom Friedman, who once again rolled out one of his favorite policy prescriptions -- an increased gas tax. Friedman wrote:

400px_Thomas_Friedman_2005__5_.jpgTom Friedman (Photo: IvyGate)

to the energy economist Phil Verleger, a $1 tax on gasoline and diesel
fuel would raise about $140 billion a year. If I had that money, I’d
devote 45 cents of each dollar to pay down the deficit and satisfy the
debt hawks, 45 cents to pay for new health care and 10 cents to cushion
the burden of such a tax on the poor and on those who need to drive
long distances. 

The first and most obvious thing to point out is that it's far more likely that Tom Friedman's mustache will be elected president than it is that Congress will approve a five-fold increase in the federal gas tax, even one phased in over a decade or more.

There is a reason that gas taxes have not been increased in 15 years: expensive gasoline in America is incredibly politically unpopular, and not without reason. Increases in gasoline prices are painful for American households, precisely because the nation is so dependent on driving.

That's the tricky part. Prices need to be higher to reduce dependence on gasoline, but that very dependence makes price increases political suicide. What is needed is either an extremely gradual increase in gas taxes (on the order of the rate of inflation plus 1 percent per year), or increases in market prices (for which politicians will still be blamed), or an indirect levy of some kind that will act to reduce consumption.

A second point is that a $1 per gallon tax on gasoline and diesel fuel won't raise $140 billion a year for very long. Why? Because consumers respond to price shifts, and they respond a lot to large price shifts.

In 2007, the average, inflation-adjusted price of a barrel of oil was about $67 per barrel, and Americans consumed about 20.7 million barrels of oil per day. In 2008, the price of oil averaged about $91 per barrel (which translates into a gas price increase of about 60 cents per gallon), and consumption fell by more than 1 million barrels per day, to the lowest level since 1998.

The price goes up and consumption goes down, reducing the revenue one earns from the increase in price. What's more, the short-run demand response will often be mild relative to the long-run response.

Faced with an increase in the price of gas, households can't do all that much in the short term to respond. They may cut out unnecessary errands, or carpool, and if they live in an area with good transit access, they'll likely increase transit ridership.

But because of the household location decisions made in recent decades, most households will have few ways to reduce gasoline usage immediately. Consumption will fall, but not by much.

If months pass and the increase persists, then responses will grow more dramatic. Households will trade in gas-guzzlers for more efficient vehicles or buy bicycles. Consumption declines will increase.

And if increases are expected to be permanent, the long-run responses will be significant. Households may begin to choose home or job locations that minimize driving or that allow for use of transit, walking, or biking. Communities may begin designing themselves differently and increasing transit service.

And ultimately, consumption may fall to near zero.

That doesn't mean that driving will fall to zero. Vehicle miles traveled per person will almost certainly decline in such scenarios, but the inevitable switch to electric vehicles or those using alternative fuels will allow millions of Americans to continue getting around by car.

But that won't do a thing for the $140 billion in revenue that Friedman would promise to debt retirement and health care. And whatever portion of transportation budgets is reliant on fuel taxes will be likewise destroyed. So what he might have written is that real men tax gas and then prepare to tax something else.

That something else will probably have to be driving itself, or congestion, or both.

It would be a good idea to charge drivers for their use of the road whether or not there was a gas tax revenue crisis. Congestion costs Americans billions of dollars a year -- a burden on wallets and economic activity that will persist even after the carbon has been wrung out of the transportation sector.

Of course, we run into trouble in assessing congestion fees just as we do with gas taxes. A fee high enough to reduce congestion is one high enough to deter driving -- which is to say, one that is felt and reviled by drivers. That will not be popular.

Even if some share of gas tax revenues is refunded to low and middle income drivers (as it should be), and even if good transit substitutes are built (as they should be), the effect of the increased cost will be to force some behavioral changes -- economically efficient and environmentally beneficial ones, it should be noted, but behavioral changes all the same.

And change is not nearly as welcome as last November's election might have led you to believe (as this summer's political shenanigans should convince you).

And so the best hope for funding is likely a combination of small measures which ramp up over time. Congress, in considering how to fund the next transportation bill, shouldn't be looking for a funding magic bullet; anything that suddenly raises a lot of money will be politically toxic.

A better idea is to focus on small increases in gas taxes along with a rollout of VMT-taxes that begin at low levels -- too low initially to do much about congestion. It will amount to less than anyone in policy-making circles really wants, but it will be a start.

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