Is Increasing Gasoline Taxes a Good Idea?

Gas prices are rising, and a lot of people are talking about how high they will go and what the impact will be to Americans. Yesterday, JLP from All Financial Matters wrote about rising gas prices and how people are reacting. The post stems from a response to one of his previous posts “How Much Does it Cost to Drive One Mile?” There are a lot of good points raised in both articles and their comments.

JLP’s posts focus on ways to lessen the blow of high gas prices and what can be done to prevent high prices from being permanent, but some people are taking a different view. A recent CNN Money article suggested that Americans should pay higher gasoline taxes similar to what Europeans pay.

What does the writer suggest? The author suggested adding a permanent fuel tax equal to $1-2 per gallon (current federal rates are approximately $.18 per gallon and most states are around $.40 per gallon). This added tax would permanently keep gas prices around $3-4 per gallon. The premise, suggested by the writer, would be to decrease demand to the point that wholesale gas prices would drop considerably. He then added a hypothetical tax to the oil companies that would in turn decrease their profits further. The additional money the government receives from these increased taxes would then be ‘distributed’ to the nation’s population. (Or at least to the military, it’s vendors, and contractors).

The writer admits that prices would initially be the same or more at first, but would then drop and the public would see the money returned from the government. He also suggested other possible benefits such as tax breaks for the poor and reduced greenhouse emissions.

Why higher fuel taxes work in Europe: Europeans implemented high gas taxes in the 1920′s when cars were first becoming popular. There was already a substantial rail system in place and European cities and towns are very close to each other making public transportation ideal. Europe is very congested, so giving people incentives not to drive is in their best interest.

The car I drove when I lived in England was tiny, but it got between 35-40 mpg, which is common in Europe. Most Europeans currently pay between $5-8 per gallon for petrol. They may not like these high taxes, but they have had over 80 years to get accustomed to them and their infrastructure supports it.

Why it won’t work in America: Americans have enjoyed cheap gas for nearly 100 years and asking people to change their culture overnight is not feasible. The American infrastructure does not support public transportation except in select cities or regions. As Americans, we have always had the option of spreading away from cities, and we have chosen to do so. Americans tend to drive large, gas guzzling vehicles. The Hummer gets around 10 mpg on a good day, and many trucks, SUVs, and other vehicles get around 15 mpg. People will not be happy if a politician tells them they have to pay an extra $20-30 every fill-up.

What the article does not mention: One thing the article did not mention is how much Americans rely on truckers to ship goods and materials. Europe has shorter distances to ship items, and usually relies on their extensive tail system to do so. There are railways in the US, but not nearly as extensive or efficient as in Europe. If a tax like this were implemented, I fully expect we would all see the cost of food, clothing, and just about everything else rise accordingly. This would hurt the poorest people most of all.

What the article assumes: The author assumes that the American government would be willing to impose heavy taxes on the big oil companies. Several billion lobbying dollars tells me this won’t happen. The other big assumption is that the government would use the hypothetical tax dollars for public spending, thus returning the tax dollars to the average American. I don’t see that happening. Currently, I think it would go to fight the War on Terror. Who knows where the money would go in a few years, but I doubt it would be returned in a way to benefit everyone.

My opinion of the article: I like when people play Devil’s Advocate, but in the case of this article I have to say: “Nice try, but you’re not convincing me this is in the best interest of Americans.”

For the record: My wife and I both drive mid-size cars that average about 25-30 mpg.