Taxing gas

Gregg Easterbrook proposes, via Allan Sloan, that the government put a tax on gas that held the price at $4 a gallon.

Why not, he supposed, tax gasoline in such a way that it will always cost the equivalent of $4 (the amount rising in sync with inflation), and at the same time abolish CAFE standards. This is the sort of transformational insight Washington needs more of. A higher gasoline tax could be used to retire national debt or to lower Social Security taxes, which matter more to average people than income taxes. If the public knew that gasoline would always cost at least $4 per gallon, super-complicated MPG regulations would no longer be needed, because free-market forces would take care of the rest -- most buyers would choose lower-horsepower higher-mileage cars of their own free will. Those who were willing to pay the piper could purchase whatever kind of vehicle they pleased. Detroit wouldn't have to spend any time or money twisting arms in Washington, and could focus its energies on car-making rather than on regulatory lobbying.

He goes on:

Either the national debt or Social Security taxes would decline. Federal bureaucracy would shrink. What's not to like?

I think Gregg is missing the fundamental idea of market transformation lag here. Increased gas prices did not just affect commuters driving to work every day, nor is the environmental impact of gas usage limited to those commuters. One of the major consumers of fuel in this country is the commodities industry that trucks its goods primarily via semi-trucks and diesel powered trains across the country.

$4 gas simply wasn't instantly sustainable. The price had outrun gradual inflation, and although some would argue it was still behind the equivalent price of gas in the 60's, you can't ignore that the economy was built around a set price of gas and would have adjusted to gradual inflation, a sudden spike in price was an aberration, not a correction. Surely there will be a day when gas will cost $4 (and $5 diesel), and the global economy will adjust, but summer 2007 wasn't that day.
Second, you can't instantly switch from your gas guzzler to a hybrid. Many consumers, like carpenters, electricians, and various contractors are reliant on their pickup trucks to carry their tools of the trade. Many people are locked into 5 year plans to pay off their current SUV that they can't even give away. $4 gas was hurting the U.S. economy, and although it sure made hybrids and electric cars seem super neat-o, well, they've always been super neat-o. But we can't all just up and buy one today.

I appreciate the idea of setting a price on gas and using the extra tax revenue to pay our bills. But what happens when the Federal Budget becomes used to getting several hundred billion dollars a year in tax revenue and market factors drive the price of gas to $4.25? Suddenly there is no tax revenue from gas...where does the government make up the loss on their balance sheet?


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