Thursday, April 21, 2011

When Economic Efficiency and Irrationality Collide: The Debate Over Raising the Gasoline Tax

Recently, in the face of the turmoil in the Middle East, Thomas Friedman renewed his call for a substantial increase in the gasoline tax in the U.S. If there was ever an easy policy decision to make - from the perspective of increasing economic efficiency, increasing overall societal welfare, and supporting good public policy - then raising the gasoline tax is it.

Martin Wachs gives a dozen reasons to raise the gas tax (his reasons are phrased in rather wonkish language, so I'll elaborate in parentheses where I think it would be helpful):
  1. Motor Fuel Taxes Are Lower Now Than In The Past (the gas tax hasn't changed in nominal terms since 1993, so inflation has decreased the effective [real] gas tax by 1/3)
  2. Fuel Taxes Are Well Below Levels In Other [Advanced] Countries:
  3. Fuel Taxes Are Well Below Their Theoretical Optimum (cf. Parry and Small)
  4. Drivers Show Remarkable Tolerance For Fuel Price Changes (though people talk about gas prices a lot, people don't rebel because of gas prices, even when they increase sharply in a short period of time)
  5. The Cost Of Transportation Projects Continues To Rise Faster Than Revenue (construction costs are rising)
  6. Congestion Is Growing In Part Because We Are Not Spending Enough On New Capacity (people are driving more, but there aren't many new roads, and the roads we already have aren't maintained well - which costs the average driver several hundred dollars a year in extra car repairs)
  7. Relative Declines In Fuel Tax Revenues Increase Reliance On Non-Transportation Related Taxes To Support Transportation Projects (roads are being paid by for by non-drivers, which does not make economic sense)
  8. The Relative Decline In Fuel Tax Revenues Is Increasing Borrowing For Transportation Projects And Programs (we are borrowing to pay for roads, which does not make economic sense)
  9. Fuel Taxes Have Low Collection Costs And Are Relatively Fraud Proof (as opposed to, say income taxes)
  10. Fuel Taxes Are User Fees That Send “Price Signals” To Motorists To Use The Transportation System More Efficiently (if driving is more expensive, people will do it less)
  11. Fuel Taxes Are Fairer Toward The Poor Than The Alternatives Currently Available (even though the poor spend a higher percentage of their income on gas, they spend far fewer dollars on gas than wealthier people, and the tax is only paid by poor people who drive)
  12. Fuel Taxes Make It Easier To Transition To Better User Fees In Coming Years (with gas-less electric cars coming, we've got to figure out some way to pay for transportation other than gas taxes)
I'll add some less tangible reasons why raising the gas tax would be beneficial:
  1. We capture some of the rising price of gas as tax revenue, rather than giving it all to oil-exporting countries (there is a more nuanced argument behind this, but I'll leave it at this simplification for now).
  2. It provides economic incentives to use more fuel-efficient cars, decreasing our dependency on foreign oil sources and increasing our energy security.
  3. We decrease emissions of carbon monoxide, carbon dioxide, and other pollutants from cars.
  4. The revenue from the increased tax can be used to improve transportation, decrease the deficit, etc.
In spite of all these reasons to increase the gas tax, I don't think it will happen any time soon, for the simple reason that 71% of Americans don't support raising the gas tax to improve transportation, and 75% of Americans don't support to raise the gas tax to reduce the deficit.

From these poll numbers, it might appear that raising the gas tax is tantamount to political suicide - it may be, I'm not sure. It seems strange to me that consumers are only OK with paying higher gas prices if that money goes to oil companies. As you can see above, there are several extremely strong arguments for raising the gas tax, but people may not be willing to listen, since Americans seem to have an irrational relationship with gasoline prices.

I'm from the South - I grew up with this same irrational relationship with gas prices. My dad would drive (and probably still does - I'll have to ask him) 10-15 minutes across town to save a few cents per gallon on the price of gasoline, saving him perhaps $1-2 per fill-up - however, a rational cost-benefit analysis should say that the $1-2 he saved was not worth the 20-30 minutes he spent to save the money (and he probably burned up much, if not all, of the $1-2 savings by driving 20-30 minutes in the car anyway). I cannot think of any other product that a large segment of Americans will readily use 20-30 minutes of their time in order to save less than $1-2.

One of the things I can see out of my office window is a sign with gas prices on it. In the week from Feb 22-March 1, the gas price at this station rose from $3.13/gal to $3.34 per gal (a 6.7% increase). My (irrational) brain thought, "woah, what a huge increase!" - even though the actual difference to me is only about $2 when I fill up my car (granted, my car is a small Toyota Corolla), which I only do about once a month. But internally, I wanted to flip out, as my coworkers were doing, because we Americans seem to have an irrational understanding of and relationship with gas prices. And I can't do anything about the price of gas anyway - the best I could do is purchase the lowest price gas in my area (usually the gas station next door), but the different per gallon between that station and the most expensive one nearby is $0.20 - so at the most, I'm saving $2 a tank (generally $2 per month) by finding the cheapest gas.

The difference between the cheapest and most expensive gas in small Southern towns like the one I grew up in, where people flip out even more over gas prices, is probably smaller than $0.20 - more on the order of $0.10, if I remember correctly, or $1-3 per tank, depending on whether you have a 10 or 30 gallon tank.

Therefore, I have decided that I am going to give up "shopping around" for gas prices - the extra time that I will spend trying to find the lowest price, driving to get it, and driving back is not worth the $1-2 per tank I'd save (and with the extra fuel burned to seek out the extra gas, I might not end up saving anything at all). And you should probably give up "shopping around" for the cheapest gas too.

And since the cost is relatively small, compared to things like housing and food, I'd gladly be willing to pay a higher gas tax - it's the rational thing to do. Who's with me?

(.... Grant listens to the crickets chirping ....)

P.S. After writing the first draft of this post, I found that Bankrate.com actually has a calculator that will show you how much you'll save by driving to get that cheaper gas - my guess is that in practically all cases, the extra time spent will not be worth the savings.

1 comment:

  1. From Dad: I have for years said the tax should be increased on gas - though truckers who fill huge tanks will not agree with someone who fills a Corolla once a month. And, yes, I will schedule a trip around the cheapest gas, I do NOT drive 15 minutes across town to save a few pennies.:)

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