Read My Lips: One New Tax

“Tax” is a dirty word in politics. Tax increases are always unpopular with voters; no one likes to give up more of their salary to the government. Politicians are aware of this, and frequently include anti-tax rhetoric in their campaigns. George H.W. Bush’s famous campaign promise “Read my lips: no new taxes” exemplifies the power that anti-tax rhetoric possesses to help politicians to victory. One of the surest ways for a candidate to win votes is to accuse their opponent of wanting to raise taxes on hardworking American families.

Taxes, of course, are necessary to raise revenue to allow the government to operate. Furthermore, taxes can serve as incentives to deter behavior that society deems undesirable. For example, so-called “sin taxes” on tobacco and alcohol discourage the socially costly activities of smoking and drinking by increasing the price of the product.

In certain situations, taxes can even be economically efficient. Activities like smoking and driving have extra costs to society, called externalities, that are not borne by the consumer. Smoking produces secondhand smoke, which can cause lung cancer in non-smokers, as well as increases the amount of healthcare required over the lifetime of the smoker.

Similarly, driving has other costs besides the cost of gas. Driving produces emissions that contribute to global warming and urban smog, congestion that affects other drivers, and accidents. Although driving causes all of these negative side effects, drivers do not pay these costs. The only additional cost of driving an extra mile is the fuel required, even though driving that extra mile adds pollution, contributes to congestion, and creates the risk of an accident.

Economics provides a simple solution to this problem: force drivers to “internalize” the negative externalities, or social costs, that they create. The classic solution is a Pigouvian tax, a per unit tariff that increases the price of the activity by an amount equal to the social costs it creates. Practically speaking, that would require increasing the federal excise tax on gasoline. Currently, the federal government charges a tax of 18.4 cents per gallon. That is altogether too low.

According to research by the economists Ian Parry and Kenneth Small, the current federal gasoline tax is far below the level that would cover all of the externalities of driving. In 2005, they calculated that the optimal gasoline tax was $1.10 per gallon. Adjusting for inflation, that is $1.36 in 2016 dollars – well over a dollar more than the current federal gasoline tax. To rectify this, the federal government should increase the federal gasoline tax by at least $1.

According to gasbuddy.com, the average price of a gallon of gas in the United States is about $2.20. Although predicting oil prices is a fool’s game, the current supply glut suggests that it is more likely than not that oil prices will remain relatively low for a relatively long period of time. Although implementing a new tax will never be popular, the time is right for this necessary policy change. It is better to implement a new tax when prices are low than when consumers are hurting at the pump. To minimize the impact of the tax on consumers, it could be implemented gradually, over a period of several years. Tax increases are unpopular enough in the best of times; attempting to increase the gas tax when fuel prices are already high would be politically impossible. The time to act is now, while gas prices are near five year lows.

A higher gasoline tax would incentivize drivers to use less gas, either by driving less or buying more fuel efficient cars. Both of these outcomes are desirable, because cars and trucks together create about 20 percent of greenhouse gas emissions in the United States. This policy change would help fight climate change by decreasing the amount of greenhouse gas emissions the United States adds to the atmosphere every year. Additionally, if Americans drive less, there will be fewer fatal car accidents, less congestion on the roads and less urban smog.

Although tax increases are unpopular, an increase in the federal gasoline tax would be a net benefit to society. In order to make such an increase politically palatable, it could be phased in over the course of several years. In addition, the new revenues could be used to fix America’s crumbling infrastructure, one of the few areas of political consensus in today’s highly polarized political climate.

Michael Fogarty

Michael Fogarty '19 studies in the College of Arts & Sciences. He can be reached at michael.fogarty@wustl.edu.

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