Talk of Raising Gas Tax Is Just That
Analysts Cite Advantages but Concede Its Political Improbability

By Steven Mufson
Washington Post Staff Writer
Wednesday, October 18, 2006

There might be a simple way to trim U.S. oil imports, reduce greenhouse-gas emissions, encourage alternatives to petroleum and ease world energy shortages.

The method: raising taxes on gasoline or crude oil. Economists and policy experts across the political spectrum think it's a good idea. And with gasoline prices falling, now might be the perfect time to do it without eliciting cries of pain from U.S. drivers who have become somewhat accustomed to high fuel prices.

But on the long road to a new energy policy, the idea of a higher gasoline or crude-oil tax is just another bit of roadkill.

Because of the thorny politics of raising taxes, the 18.4-cent-per-gallon federal gas levy hasn't changed since Oct. 1, 1993. And few policy experts expect a higher tax soon.

"We know the broad contours of some things that have to happen," said Douglas Holtz-Eakin, former director of the Congressional Budget Office who is now at the Council on Foreign Relations. "You have to price oil on a permanent basis to provide incentives to shift away from it. It's the key issue -- and the hardest one to make progress on."

Leon E. Panetta, a former congressman and President Bill Clinton's first budget director, sees things the same way.

"I don't think there's any question that as a matter of policy it makes a lot of sense to move in that direction," he said. "But politically it's a very high hurdle to get over."

Panetta knows from experience. When Clinton took office, Vice President Al Gore argued for a big gas-tax increase to promote conservation, and many administration members agreed, Panetta recalled. But, he said, "there were also those like Treasury Secretary [Lloyd] Bentsen who said, 'Are you out of your mind?' "

By the time Congress was done, what started out as a 50-cent-a-gallon proposal ended up as a 4.3-cent-a-gallon increase. Since then, just to keep up with inflation, the tax would have had to rise 6 cents, but it hasn't budged.

Many economists support oil taxes because otherwise the prices paid by consumers do not include costs -- such as pollution -- that society pays separately. Senate Foreign Relations Committee Chairman Richard G. Lugar (R-Ind.) has estimated that the U.S. military cost of protecting Middle East oil supplies runs around $50 billion a year.

Such hidden costs were called "externalities" by the British economist Arthur Pigou. N. Gregory Mankiw, an economics professor at Harvard University and former chairman of President Bush's Council of Economic Advisers, has created his own Pigou Club, which he describes as "an elite group of economists and pundits with the good sense to have publicly advocated higher Pigovian taxes, such as gasoline taxes or carbon taxes." But the club exists only on his Web site.

One member is Kenneth S. Rogoff, a Harvard economics professor and former chief economist of the International Monetary Fund. "A sharp hike in energy taxes on gasoline and other fossil fuels would not only help improve the government's balance sheet, but it would also be a way to start addressing global warming," Rogoff wrote before the IMF and World Bank meetings in Singapore last month. "What better way for new U.S. Treasury Secretary Hank Paulson, a card-carrying environmentalist, to make a dramatic entrance onto the world policy stage?"

But for now, Paulson has left a gasoline tax increase waiting in the wings.

One illustration of political gridlock on the issue is a new Council on Foreign Relations task force report on how U.S. dependence on oil imports undermines U.S. foreign policy. The group agreed that there is a big problem but couldn't agree on how to curb gasoline consumption.

The report listed three approaches: raising gasoline taxes; setting tougher automobile fuel-economy standards; and imposing a nationwide ceiling on gasoline consumption, with people allowed to buy and sell rights to use more than their annual allotments.

"No strategy will be effective without higher prices for transportation fuels or regulatory incentives to use more-efficient vehicles," the report said. But the task force didn't say which of the three it favored and it didn't say how much a tax might be.

Holtz-Eakin, a member of the group, said new efficiency standards would have a delayed effect on consumption because it takes time for auto companies to retool and for people to buy new cars. A higher gasoline tax would have an immediate as well as a long-term effect.

But other members of the group, including Martin S. Feldstein, a Harvard economics professor who was chairman of President Ronald Reagan's Council of Economic Advisers, and Charles J. DiBona, former president of the American Petroleum Institute, vigorously oppose gasoline taxes.

"It was not possible to get a consensus," said James R. Schlesinger, a co-chairman of the task force.

Schlesinger, who favors a tax on imported oil, said, "I still have some black and blue marks from 30 years ago," when he was energy secretary for President Jimmy Carter, who proposed a 50-cent increase in federal gasoline taxes. "We were laughed out of the Senate," Schlesinger recalled.

A one-cent federal gas tax was first imposed in 1932. An increase to 9 cents a gallon from 4 cents a gallon was approved by Reagan on Jan. 6, 1983. On Nov. 5, 1990, a reluctant President George H. W. Bush signed a deficit-reduction compromise with the Democratic-controlled Congress that increased the federal gas tax by 5 cents. The budget bill of 1993, signed by Clinton, increased the tax to its current level.

The politics of a gasoline tax involve two key issues: what to do with the money and how to address the fairness of the tax.

Most of the tax goes to a trust fund used to build highways, which advocacy groups say undermines conservation goals by encouraging more driving. Energy-policy experts say any extra tax money could be used to promote alternative energy or energy-efficiency programs. Because a gasoline tax, like a sales tax, disproportionately hurts low-income people, who pay a larger percentage of their earnings for basics such as fuel, other experts argue that the additional money should be used to give offsetting tax breaks to low-income families.

This year, some new proposals have emerged for limiting gasoline consumption. Lugar has proposed that the government set a $45-a-barrel price floor for crude oil, partly to encourage investment in alternatives such as ethanol.

Feldstein favors giving every adult credits on a debit card but capping the overall consumption level. People could sell spare credits or buy them as needed. Oil companies would be clearinghouses for the program.

Mankiw responded online: "Do we need to create a new administrative bureaucracy because politicians are afraid to use the word 'tax'? I hope not."

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