Federal Reserve Board Chairman Alan Greenspan suggested yesterday that Congress raise federal gasoline taxes by 15 cents a gallon to help shrink the budget deficit.
Greenspan's remarks, made before the Senate Budget Committee, contained some unusually specific suggestions about how to reduce the budget deficit, which is expected to exceed $150 billion this year. While Greenspan's predecessor, Paul Volcker, frequently admonished lawmakers to narrow the deficit, he avoided offering detailed proposals.
Greenspan's endorsement of an increase in gasoline taxes is sure to give political impetus to the idea. The proposal, however, faces stiff political opposition on Capitol Hill from powerful oil-state lawmakers, such as House Speaker Jim Wright (D.-Tex.) and Senate Finance Committee Chairman Lloyd Bentsen (D.-Tex.).
Congressional staffers said a gasoline tax hike has almost no chance of passage during the 1988 election year. They said, though, that it might be enacted next year, when a new president confronts the nation's fiscal problem.
According to Greenspan, "A hike of 15 cents per gallon ... could raise close to $15 billion in revenues, while retail gasoline prices would still be well below the levels of the early 1980s. And if energy use is restrained at all, there is a further benefit."
The federal gasoline tax is currently 9 cents a gallon. Each penny brings about $1 billion a year into the Treasury.
Greenspan disclaimed any intention of infringing on Congress's prerogatives, saying: "It would be inappropriate for me to offer suggestions on specific program actions to reduce the deficit. The choices are political, not economic.
"But simple arithmetic points clearly to those areas where the scope for action is greatest."
Entitlement programs, which include Social Security and Medicare, "offer substantial opportunities for long-term budgetary savings, since they account for nearly half of total outlays," Greenspan said. He observed that these programs are projected to grow steeply as the population ages, and he urged lawmakers to "take bold, controversial actions ... that will result in significant saving, not just this year or next, but on a lasting basis."
By contrast, domestic "discretionary" programs, which include law enforcement, air traffic safety and other essential services, can't be cut much more than they already have been, Greenspan said.
Defense spending, too, is difficult to cut in ways that offer substantial savings, Greenspan said. The Fed chief said that major weapons systems have already been ordered and, in some cases, delivered, so the defense budget is moving more "toward maintenance levels" that are hard to reduce.
Greenspan urged that Congress focus on spending cuts rather than tax increases, but he said that higher taxes shouldn't be ruled out.
The Fed chairman's testimony drew a mixed response from the committee. Sen. Pete Domenici (R-N.Mex.), the panel's ranking minority member, seemed surprised at Greenspan's remarks and noted that Volcker "didn't used to tell us what to do as much as you do."
Domenici added that the Fed could contribute to deficit reduction efforts by cutting interest rates because federal interest payments on the national debt are at $140 billion and rising.
Other members complained that Greenspan should have gone even further in recommending specific tax increases and spending cuts. Sen. Ernest Hollings (D.-S.C.) said the deficit requires bolder action than a 15-cents-a-gallon increase in gasoline taxes. Hollings accused Greenspan of "tippy-toeing" around the problem.
Greenspan praised the budget agreement that the White House and Congress reached last December.
He said that while the deficit in fiscal 1988 would probably be a shade higher than the $150 billion in fiscal 1987, the agreement had kept the red ink from rising further.
But Greenspan said that the economy would benefit from further measures this year to reduce the deficit if Congress could muster the political will to enact them.
The financial markets would respond by lowering interest rates, especially long-term rates that the Fed doesn't control, Greenspan said.
Asked how much more savings would be needed to bring about such a result, Greenspan replied: "I don't want to be facetious, but more -- more than the markets expect."
Taking a "credible" action to shrink the deficit by $15 billion a year "would be a plus" for the markets, he said.
"More would be a bigger plus."