Tax more tomorrow

Two of the biggest sources of greenhouse gas emissions in the US are electricity generation and transportation. But while the electricity sector is doing a great job bringing down its emissions, the transportation sector is not. Why not? Mostly because of a complete reluctance among politicians to raise the gas tax.


A recent study puts the social cost of gasoline at a whopping $3.80 a gallon, but any politically reasonable gas tax is going to be a lot short of that. Fortunately, a tax doesn’t have to reach the socially optimal level to serve its purpose. Because alternative transportation, namely electric vehicles, are already cheaper to operate than gasoline-powered transportation, a much more modest gas tax would probably be a sufficient incentive to get people to switch to electrics.


Unfortunately, at current levels or even a bit higher, a gas tax alone is not going to work, as I explained in a previous post, because there are other policies—such as subsidizing non-gas-using vehicles—that suppress demand for gas. As those policies reduce demand for gas, the price of gas goes down, offsetting the gas tax. True, the price of gas is low now for unrelated reasons, but it illustrates the long-term contradiction at the heart of our climate policy.


New Jersey is struggling to finance its roads and can’t muster the energy to raise the gas tax, the lowest in the nation. But don’t just harsh on Jersey. The US Congress also can’t raise the gas tax, and had to resort to a bunch of budget gimmicks to fund the transportation bill.


So why is it so hard to raise the gas tax? Sure, no one likes taxes, but people are willing to raise the sales tax, and parcel taxes pass all the time. What is it with the gas tax?


I think a big part of the problem is that people price in cheap gas to big decisions that are hard to undo later. When gas is cheap, it’s easy to buy a big gas guzzler and drive out to look at homes on the outskirts of town. But once you’ve got that Chevy Tahoe and are driving 15 miles each way to work every day, gas is a significant chunk of your budget. If someone comes along and says that your 45-minute commute can be cut to 30 if they build a new highway, you’re all for it. But only if they don’t have to charge you more for gas. Because it’s a hard to get out of reducing your gas expenses, it feels like an ugly surprise to have to pay a higher gas tax.


People should not be surprised, of course. The gas tax has been low for years, and the infrastructure deficit is growing and growing. Meanwhile, because gas prices are so low, raising the gas tax would bring the total price of gas only up to historically average range. It’s just that the person who bought a big car when gas prices were low assumed that they would be low for years. And the person who bought the big house—or even the small house at the edge of the city where they could qualify for a mortgage—was counting on that gas prices would be low forever.


So what we really need is a variable gas tax that is set in a way that ensures that the price of gas never goes below a certain floor. Pick any price you like—say $2.50 a gallon to start with—and then tax gas whenever the price falls below that level. Over time the floor price could gradually go up in a predictable way. With this floor price strategy, people making decisions about cars and houses would know what the minimum gas price will be 5 or 10 years from now.


This approach to the gas tax mimics the highly successful Save More Tomorrow plan, in which employees agree to have employers increase the amount withdrawn from their paychecks at various points in the future. While it can be hard to imagine taking 5% or 10% out of a current paycheck, many people figure that when their pay goes up they’ll be able to afford to save more. Behavioral economists have found that when this plan is offered to employees, 78% of people sign up, 80% stick with it for years, and after 3 ½ years of participating, average savings rates more than triple. That’s a tremendous success for a program that doesn’t use coercion, but just leverages the power of the future.


Public policy makers should take a page from this book. Pre-commit to very small, but gradual and predictable gas tax increases, and the public may be much more likely to go along.


Tax more tomorrow – it’s the solution of today.

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