Why There Won't Be Too Much Pain At The Pumps

Although the coming 4.3 federal gasoline tax hike has raised hackles among the driving public, it still appears mighty small to America's industrial trading partners. Not only are gasoline taxes and prices far higher in Europe and Japan (chart), but they are being raised aggressively as governments tackle growing budget deficits. Britain, whose taxes account for 70% of the retail gasoline price, hiked them by 10% last March, for example, while Germany raised them by 36% in 1991.

Thus, from a competitive standpoint, U.S. gasoline and fuel taxes still favor U.S. industry by a healthy margin. Moreover, experts note that the tax hike will have beneficial effects on pollution and energy dependency. Alan J. Krupnick, Margaret Walls, and H. Carter Hood of Resources for the Future, a Washington environmental research group, estimate that it will reduce the annual distance the average car is driven by 243 miles--cutting gasoline usage by 1.9% and oil imports by 2% or so.

Using New York City as an example, the RFF researchers estimate that by reducing motor vehicle usage, the tax hike will achieve close to 4.2% of the emission reductions mandated by the Clean Air Act of 1990. And measured by foregone tax revenues due to reduced gasoline purchases, they say, "the cost-effectiveness of the tax is close to that of other air-quality improvement approaches such as enhanced vehicle inspection and maintenance programs."

Consumers, however, remain understandably troubed. Partly because of far lower gasoline prices, Americans drive two to three times more miles a year than the Japanese and Europeans, so a small tax hike costs them far more. Still, the RFF researchers estimate that the average increase in taxes will be small, running about $44 per household, or 0.13% of average household income, with poorer households and residents of some states anteing up as much as 0.19%.

But the irony of the tax increase is that it is far overshadowed by the decline in gasoline prices during the past decade. Since 1981, the average price of unleaded gasoline at the pump, including all taxes, has fallen from about $1.38 per gallon to $1.08. In inflation-adjusted terms, the price of gasoline is now actually lower than it was before the huge price runup of the mid-1970s.

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