Detroit's Salvation: Higher Gas Taxes

America's "Cash for Clunkers" program is over. The nearly $3 billion initiative to boost auto sales successfully encouraged car owners to swap some 700,000 aging, fuel-guzzling vehicles for newer, more fuel-efficient ones. Consumers that benefited from a subsidy of up to $4,500 took advantage of the opportunity to upgrade their vehicles.

Cash for Clunkers provided a sizable boost to U.S. vehicle sales amid a major economic downturn. There's a reasonable case that the program's timing did create enough demand to stem some of the economy's downward momentum during the summer.

Still, the program has come in for a fair share of criticism. For one thing, it probably cannibalized planned future vehicle purchases, since new-car sales plunged to their lowest level in seven months in September, the first post-Cash for Clunkers month. For another, even its supporters acknowledge that much of the benefit went to non-U.S.-based manufacturers rather than beleaguered Detroit.

And conservatives continue to oppose it on principle. For instance, a scathing Wall Street Journal editorial on Oct. 5 sneered that "you can't raise living standards by breaking windows so some people can get jobs repairing them."

"The Best Thing That Could Happen" But both supporters and opponents of the plan are missing the message in the Cash for Clunkers experience in the U.S. (and in Europe, where similar programs have been even more successful). It suggests a way to revive the American auto industry, defined as any automaker with manufacturing plants in the U.S. and not simply the Shrunken Three: Hike the federal gasoline tax—currently at 18.4¢ a gallon—substantially. (Including state levies, the gas tax averages about 40¢.)

Drivers, take a deep breath and read on.

"If we raised gas taxes that would be the best thing that could happen to the auto industry," says Barry Bluestone, an economist and director of the Center for Urban and Regional Policy at Northeastern University.

Of course, Detroit and its car dealers in every American community have long been vehement opponents of a higher gas tax. That position is badly outdated, a relic of another era and economy. It's time for the industry to wake up and smell the exhaust fumes. The future lies with getting clunkers off the road as swiftly as possible. A higher gas tax would encourage consumers to turn in even more of their less fuel-efficient cars for newer vehicles that get more miles to the gallon. Bluestone notes that Detroit should benefit since the automakers are coming out with more fuel-thrifty cars, too.

That's why automakers and their dealers should start lobbying Washington to hike the gasoline tax sharply. They should negotiate peace treaties and alliances with their traditional nemesis, environmental organizations. A higher gas tax is one of the most powerful mechanisms available to policymakers for addressing global climate change and encouraging greater conservation. Together, their lobbying clout on Capital Hill would be considerable.

Two Bucks More Per Gallon? How much should the gas tax be hiked? N. Gregory Mankiw, economist at Harvard University and former chair of the White House Council of Economic Advisers under President George W. Bush, has called for an increase in the gas tax by $1 per gallon, phased in 10¢ a year over a decade. (Mankiw summarizes his argument for a higher gas tax in Smart Taxes: An Open Invitation to Join the Pigou Club.)

That figure may be too modest. A 2007 article in the Journal of Economic Literature by three economists came up with an optimal tax on gasoline of $2.10 per gallon. No matter what, either figure is up sharply from the current level of taxation.

To be sure, a higher gas tax will hit hard many low-income workers who drive to work in battered old cars bought on the cheap. The federal government could offset the hardship with a low-income tax credit. Local entrepreneurs will find a way to offer low-cost transportation, much as is the case in many immigrant neighborhoods in major urban areas. However, the real change will come with time as a higher gas tax stimulates additional investment in public transportation.

A gas-tax hike would address global warming and revive the American auto industry. It's also a way for state and local governments to preserve the dwindling ranks of car dealers, an important source of tax revenue. The time to enact the "Gas Tax for Clunkers" program is now.

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