Higher Gas Tax? Smart Move

Raising it to 50 cents or $1 per gallon would push conservation and send a signal to America's enemies. It's the surest way to cut oil dependence

By Christopher Farrell

Thanks to rising oil prices, the price of running a modern economy keeps spiraling higher. Crude has more than doubled since 2003, to some $65 a barrel, hitting a peak of $67-plus earlier this month. The average price for a gallon of gas has climbed to a record national average of $2.55. From Los Angeles to Boston, we're all suffering from price shock when we pull into a gas station.

What sort of action should government take in response to high energy prices? How about hiking the federal tax on gasoline? Yes, you read that right. Washington should raise the federal tax on gasoline from its current 18.4 cents a gallon to 50 cents -- or even $1.


  The payoff from a steep gas tax could be huge, ranging from reduced reliance on Persian Gulf oil producers to a surge in technological innovation in energy. What's more, an audacious gas-tax initiative would give comfort to our allies and unsettle our enemies -- two big pluses during the war against terror and the fighting in Iraq.

True, Congress recently passed new energy legislation. But to call it pork-laden would be an insult to the sausage-making industry. The bill had little to do with savvy national energy policy and everything to do with rewarding well-heeled constituencies, such as the oil and gas industry, ethanol farmers, and nuclear power companies -- not to mention indulging in such ludicrous moves as extending daylight savings time.

President George Bush acknowledged that the 1,700-page-plus bill he signed into law on Aug. 9 in Albuquerque wouldn't provide price relief for consumers. "This bill is not going to solve our energy challenges overnight," he said. "It's going to take years of focused efforts to alleviate those problems."


  Why wait? A gas tax is efficient. High pump prices are already dampening consumer demand for gas-guzzling SUVs and spurring sales of fuel-thrifty hybrids such as the Toyota (TM ) Prius.

One reason for embracing a tax over, say, tightening the Corporate Automobile Fuel Economy (CAFE) standards is that a tax unleashes the power of the market rather than relying on bureaucratic rulemaking. The price of gas goes up. Consumers then decide how to spend their money rather than Congressional barons and high-paid petro- and auto-lobbyists negotiating over minimum mileage standards, truck weights, or any of the other controversial issues that dog CAFE.

Get rid of CAFE. A high gasoline tax is a far superior tool for encouraging consumers to choose fuel efficiency. And if someone really wants to own a giant SUV, that's fine -- so long as they're willing to pay the pump price.


  Perhaps more important than economic efficiency: The incentive higher taxes could give to technological innovation. A steep gas price will make consumers far more likely to try biodiesel and plug-in hybrids that until recently haven't been price-competitive. It can also spur inventors to come up with ever more energy-frugal devices. Taken together, the price for technological innovation will fall as the market for alternatives technologies grow.

Of course, a gas tax could exacerbate the financial pain many consumers feel today. But any cut in disposable income is likely to be short-lived. The reason, quite simply, is that markets work. Oil and gas prices will come down as demand declines and conservation grows. Foreign producers of oil would also realize that it's in their interest to keep prices down. A gas tax would put a floor under the price of oil to accomplish the goals of lessening America's dependence on the Middle East.

The economic arguments in favor of a gas tax are overwhelming. But the gas-tax debate has never been about the economics. The politics are toxic. Just ask John Kerry about the political beating he took during the 2004 campaign over his support for a 50-cent-per-gallon tax increase a decade ago. Yet there's reason to believe that bold political leadership could shift the politics behind a gas tax.


  Environmentalists have long and predictably supported a gas tax. But now the national security establishment may be open to persuasion. Take the recent policy paper "Oil & Security," written by former Secretary of State George P. Schultz and former CIA Director R. James Woolsey and published by the Committee on the Present Danger. They write: "We spell out below the risks of petroleum dependency, particularly the vulnerability of the petroleum infrastructure in the Middle East to terrorist attack -- a single well-designed attack could send oil to well over $100/barrel and devastate the world's economy.

"That reality, among other risks, and the fact that our current transportation infrastructure is locked into oil, should be sufficient to convince any objective observer that oil dependence today creates serious and pressing dangers for the U.S. and other oil-importing nations."

These two Washington power brokers call on the government to support at least six technologies to reduce America's dependence on Middle Eastern oil. But why not join hands with environmentalists and choose a far more economical choice -- a gas tax? There's common ground to negotiate between those concerned about the environment and those worried about national security. After all, a gas tax would show that Americans understand that the world changed with 9/11.


  Dartmouth University economist Andrew Samwick recently argued on his blog, "We want to signal our resolve to protect our Constitutional republic and our society based on liberty. Like anything else, we want to economize on the signal -- to pick the signals that give us the most protection from or intimidation of the enemy at the lowest cost."

Among the possibilities Samwick listed is "a pretty large tax on oil." I nominate a $1 gas tax. Either approach would send a powerful signal to the oil cartel, hostile regimes, and terrorists that it's no longer business as usual in the U.S.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online

Edited by Patricia O'Connell

Before it's here, it's on the Bloomberg Terminal.