How to Pass a Gas Tax

The politics of an unpopular policy
In 1993, President Bill Clinton pushed the last bill through Congress to increase the gas tax. Even this, however, was watered-down reform; the tax was not indexed to inflation and increased the price of gas by only 4.3 cents per gallon. The modesty of the increase should not be surprising: since 1993, no prominent American politician has seriously supported a major increase in the gas tax. Virtually everyone agrees that supporting the gas tax is political suicide. As Michael Cragg, an energy consultant at The Brattle Group, told the HPR, “It’s hard to see in this political environment how you’d get a gas tax passed.”
A similar consensus exists among economists, but on a different issue. According to a study in the Journal of Economic Literature, the vast majority of economists support a gas tax in order to make the private cost of driving a car reflect its actual social costs: global warming, air pollution, traffic congestion, and highway maintenance. Economists from across the political spectrum—Freakonomics author Steven Levitt, Nobel laureate and New York Times columnist Paul Krugman, and even the chairman of George W. Bush’s Council of Economic Advisors, N. Gregory Mankiw—have come out in support of raising the gas tax.
How can a policy make so much economic sense and garner so little political support? Significant obstacles, including the anti-tax movement, vested interests in low energy prices, regional differences, and America’s short election cycle, have historically made the gas tax unpopular and unfeasible. Our energy future and climate security depend on either tweaking the tax to make it more politically palatable, or exploring creative alternatives.
The Anti-Tax Establishment
Perhaps the most fundamental reason why a higher gas tax is so controversial is because it hits everybody, and hits them in a very public way. William Gale, senior fellow at the Brookings Institution and co-director of the Tax Policy Center, told the HPR that the anti-tax movement “will seize on every tax,” and the gas tax is an easy target. Represented by vocal advocacy groups such as Americans for Tax Reform and the various Tea Parties, the anti-tax movement “does not make a distinction between distortionary and distortionary-correcting taxes,” Gale said.
“They just hate all taxes,” he continued, “and every attempt at an increase in taxes becomes an opportunity for [their] political gain.”
Looking closer at the particulars of the gas tax raises an equally problematic obstacle: the culture of low energy prices. According to Henry Lee, director of the Environment and Natural Resources Program at Harvard’s Belfer Center for Science and International Affairs, America’s energy policy has been governed by a single goal for the last 40 years. “Americans for almost two generations have lived under the idea of cheap energy,” he explained, making it almost impossible to pass laws involving price increases. At this point, such laws could seem almost un-American.
Democratic Divisions
The gas tax also raises a thorny question of fairness. Rural inhabitants, who drive farther and more often than do urban residents, would face steeper costs if the federal gas tax went up. Politicians that represent rural districts are simply responding to their constituents’ concerns by opposing the gas tax.
Gale identified this “urban-rural divide” as one of the two most salient obstacles to the gas tax, in addition to the anti-tax movement. Recognizing these regional disparities raises questions about institutional problems in American democracy. To say, as many do, that lack of progress on the gas tax is part of a Big Oil conspiracy ignores the ways in which representative democracy can often forestall consensus.
America’s short, two-year election cycle is a major barrier to passing a higher gas tax. Politicians tend to ignore proposals that involve an immediate, perceivable cost and provide less tangible, long-term benefits. Thomas Sterner, former president of the European Association of Environmental and Resource Economists, told the HPR that this is the “big problem” of gas tax politics. In countries with short electoral cycles of two to four years, attempts to increase the gas tax “will only cause protests,” Sterner said. It can be very difficult to promote farsighted, technocratic solutions in a political environment defined by short-term gratification.
Tweaking the Gas Tax
Recognizing that political barriers will make increasing the gas tax difficult, policymakers need to start thinking outside the box. One possibility, Sterner proposed, is the “fuel price escalator,” raising the tax gradually over the course of many years. Sterner said that this is “the only workable model.”
By making the price increases less immediate, the fuel price escalator resolves some of the difficulty posed by an electoral system focused on short-term gain. This explains, in part, how the United Kingdom under Margaret Thatcher was able to move from a relatively low gas tax to one that charges over 300 percent of the retail price, the highest in Europe.
Efficient use of revenue from the gas tax, Sterner said, is also important. The careful use of rebates can correct the regressive elements of the tax and can also make the increase in fuel prices more palatable to rural residents. Furthermore, the gas tax is essential for deficit reduction. “It’s becoming abundantly evident that we need the money,” Gale said.
The current gas tax can no longer keep up with escalating road and highway spending; this year’s highway appropriations were made possible only by siphoning funds from the general budget, which, according to Lee, has never been done before. Lee noted, “You’re going to have to have a change in the system in the next five years,” because there is “no way” Congress can continue propping up the transportation budget with general funds.
A final component of a revised gas tax might be a price floor, which would keep the price of gas relatively stable by taxing the difference if the price dipped below a certain mark. This would create a predictable environment for long-term investment in new-energy technologies that hold the key to a low-carbon economy. As Lee explained, “[Oil price] volatility gets people to under-invest.” By giving investors a stable price they can use to gauge the cost-effectiveness of future energy sources, a price floor could contribute to innovation.
The disconnect between good policy and good politics is one of the most frustrating dilemmas of American democracy. Absent substantive change in the near future, the United States risks heightened fuel price volatility, decreased economic competitiveness, and the negative effects of climate change.
Policymakers will need to search for creative solutions that are both true to the spirit of economic efficiency and more palatable to constituents focused on short-term interests. If they are able to do this with the gas tax, they might learn lessons that can be applied in other difficult and thorny areas of public policy, like immigration and entitlement reform.
Will Rafey ‘13 is a Staff Writer.
Infographic: Neil Patel
Photo Credit: Flickr (Indy Charlie)