Tax Analysts Blog

Help Detroit with a Gas Tax

Posted on May 20, 2009

Economists always argue that the best way to cut fuel consumption is to hike the gas tax. For example, a recent paper by an economist at the University of California at San Diego found that increased gasoline taxes would decrease consumption for about one-sixth the economic cost of a corresponding increment in CAFE standards. Of course economists can be conveniently ignored. But most people would be surprised to know that Detroit automakers also favor a gas tax.

Economists don't like CAFE standards because they put all the onus of reducing fuel consumption on new cars. So there are no incentives for less driving of current vehicles and no incentives to scrap gas guzzlers. A gas tax would provide incentives for all fuel-saving behaviors--not just buying new fuel efficient cars.

Automakers don't like CAFE standards because it puts them at war with their customers. With cheap gas, customers want big cars, and automakers must bend over backwards figuring out ways to sell them smaller ones. With our policy of imposing CAFE standards instead of a hefty gas tax, U.S. policy has stupidly contributed to the downfall of U.S. automakers.

On May 19 President Obama announced with great fanfare a new national fuel-efficiency standard of 35.5 miles per gallon by 2016, a nearly 40 percent increase from today’s level. Three May 20 editorials from leading newspapers illustrate the confusion on this issue, and that confusion may explain why we continue on this ill-fated course of action.

The Washington Post ("Car Compact") considers the new plan "a needed intervention on the supply side." And then the editorial goes on to advocate a boost in the gas tax on top of CAFE. Wrong! Only the gas tax is needed. CAFE standards combined with a gas tax are redundant.

The Wall Street Journal ("Car Crazy") heaps its wrath on CAFE standards, but it offers no alternative. The editorial simply notes that the Obama Administration is not interested in taxes and therefore the politics are unrealistic. (No policy reason is given for shunning a gas tax.) The Journal seems to be voting for retaining the status quo. That is O.K. only if you don't believe there are good security and environmental reasons for curtailing gas consumption.

Only the Financial Times ("The Inefficiency of Fuel Efficiency Rules") gets it right. "CAFE is a deeply flawed policy," it says. "CAFE standards are inefficient because they block normal market mechanisms . . . . CAFE pre-empts rational consumer choice about how to consume less fuel . . . . CAFE amounts to a hidden, biased and inefficient tax." FT's alternative: "introducing a price on fossil fuel, through a carbon tax or a cap-and-trade program."

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