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GM Boss Wants Gasoline Tax Hike – Is This Good Policy To Meet Fuel Efficiency Goals?

| Tuesday June 14th, 2011 | 7 Comments

The Detroit News reported last week that General Motors CEO, Dan Akerson, would like to see the federal gasoline tax boosted by as much as $1 per gallon in order to encourage drivers to choose more fuel efficient vehicles. If you are a politician in office today, it’s of course anathema to talk about raising fuel taxes – unless of course you harbor some sort of political suicide agenda – and it’s at least mildly surprising that a Republican CEO would be a proponent of raising taxes on a product which directly, and potentially adversely, impacts the company he is running.

Surprising as it may be, it’s refreshing to hear someone taking an objective position that raising gas taxes can play a part in shaping desirable outcomes. Though, I suppose it should be noted that in this case, the tax hike is Mr Akerson’s preference over alternative federal fuel economy mandates currently under consideration. These could require up to 6% annual fuel efficiency increases between 2017-2025 which Detroit News says would force manufacturers to produce cars that meet up to 62 mpg, while adding $3,500 to vehicle costs. Maybe Mr Akerson deems that too restrictive?

Nevertheless, if we want to enhance fuel economy, the question boils down to whether a fuel economy mandate is a better way to do it than using a price signal – which a tax increase would bring about. If we do what Mr Akerson suggests, there is a solid argument for a fuel tax increase.

Because gasoline taxes in America are so low by comparison with much of the rest of the world, and despite the uproar over $4 plus/gallon gasoline, American’s still enjoy far lower prices than most other developed nations. Historically, this has allowed the American consumer to care far less about fuel economy, directly driving up consumption. This is neither advanced economics nor a news-flash. However, I invite you to click on this article from the Economist, which makes the case that such high oil consumption makes Americans far more vulnerable to the volatile oil prices we’ve seen in recent years. Pay particular note to the chart on the amount of tax and duties paid in Western Europe – often over 50% of retail price; strikingly higher than in the US.

The significance of this comparison is that Europeans have been driving around in fuel efficient cars for years because higher taxes have already forced them to confront expensive fuel. Consequently, even before $100 per barrel oil prices, Europeans had started to choose efficient cars and use less oil. A consequent side effect is that when crude oil prices spike, it impacts Europeans less acutely than Americans. But the main point is that whether you are a fan of such taxes or not, if we consider tax policy purely as a mechanism to engender fuel efficiency – that mechanism appears to work. This is evidenced by Europe’s experience and it’s not a lever that has really been pulled in America.

The US Department of Transportation provides this interesting look at America’s federal gasoline tax history. The motorist is paying just 18.4 cents a gallon in tax today. At $4/gallon, that’s around 4.5%, a far cry from the rate of 50% or so that Europeans pay. So, whereas we might not (and frankly should not) stomach similar tax rates, there is some scope to strike a middle ground somewhere. As well as reducing consumption, increasing gas taxes would raise revenue to pay for highway and other infrastructure upgrades that are desperately needed. And it has not been raised for nearly two decades, last adjusted on August 10th 1993, when it was raised to current levels by 4.5 cents – an increase imposed to help offset the deficit. We face a familiar deficit problem today, and it’s another use of revenue that could be raised by higher gas tax.

So, in summary: Increased gas tax revenue can help stimulate fuel efficiency, while at the same time raise revenue the government could usefully direct towards both infrastructure spending and deficit reduction. That sounds somewhat compelling, but to close, a word on the deficit.

The Leader in last week’s Economist addressed the Republican bid for the White House in which an interesting point was made that neither party is being honest about deficit reduction. In brief, whereas the Democrats cannot solve the deficit by taxing the rich alone, Republicans cannot solve it by further tax cuts and spending reductions. The Economist points out the total tax-take as a percentage of GDP is already at its lowest level for decades, and eventually must rise. In light of this, Mr Akerson’s preference to address necessary fuel economy standards by way of a higher gas taxes, could credibly be a route to greater fiscal responsibility as well as promoting environmental goals. But in the current political climate, what are the chances the political process will even allow such discourse to take place? Time will tell.

 


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  • http://www.givetogetjobs.com Stacy McCoy

    I agree that a tax hike would definitely force consumers to start exploring more energy efficient options. However, the thing I worry about is who would bear the brunt of this policy. Before certain sectors of society catch up and use more energy efficient modes of transportation, prices will most likely rise for public transportation, consumer goods, and of course gas itself. For low-income families this could really affect their lives in a big way and they might not have the capital to buy a new energy efficient car, etc. I think that potential downfall to a gas tax hike would have to be addressed.

    • Phil Covington

      Thanks for your feedback. You make a very good point about tax policy hurting the least well off more, and that is definitely a downside. I think the key to it is to phase in tax increases gradually, so that consumers are not faced with a sudden large price increase, but a gradual one over years, that allows people to use their existing vehicles until they would replace it in a typical cycle, and opt for a more efficient vehicle next time.

      The tax revenue raised over time should also not just go to roads, but ideally towards public forms of transportation too, so that people would have options to getting in their cars. But, this would all be a long term and gradual process, and would not allow a situation like it has been here in the USA, where a gas tax is both very low and unchanged for 18 years.

  • http://www.thegreenjobbank.com Bernard The Green Jobs Guru

    I think Dan Akerson is right, and he’s taking a risky position. Many Americans won’t like his suggestion, and may choose not to buy a GM car because of that.

    I happen to agree with him because high gas prices will force the issue. We’ve got to stop relying on fossil fuels, and the faster that happens, the better. I’d be very happy if the Government hiked the gas tax, and use the added revenue for green programs and infrastructure improvements, which will create more green jobs.

  • http://www.TigerGreen.co.uk Alison Tottenham

    I can’t help feeling that car producers are keen on a tax hike rather than having to redesign their cars, and governments are keen to have tax hikes as it means more money into their treasuries! Of course this does not mean less use of hydrocarbons, except by those who can no longer afford to travel. This is very much the position in the UK at present, with ‘the cart firmly in front of the horse’.

    It would be nice to see some common sense brought into play, whereby more efficient cars were developed and put on the market. Then folk would still be able to afford to drive to see friends, relatives and partake in sports such as Orienteering; and they would be able to have a vehicle with lower emissions. Lets put the horse infront of the cart.

    As for alternative fuels, we know that we can produce large amounts of oil from algae and some manipulated members of the cyanophyta, as well as Oilseed Rape of course. So lets continue the development of these diesel substitutes, and combine them with the petrol substitutes derived from such crops as sugarbeet etc. The mooted change to electric vehicles does nothing to save hydrocarbon and carbon dioxide release as it simply moves the release point from the cars to the power stations; and with our present population, it is unfortunate but true that we cannot simply convert all our power stations to the burning of biomass.

    • Phil Covington

      Thanks for your comments. I agree some people will just pay the premium and still ignore fuel economy, but overall, the European vehicle fleet is more fuel efficient as compared with the USA. Greater use of efficient diesels for example, and smaller gasoline engines too. In addition, taxes levied have been incremental over many years, so people initially will feel the tax hike less dramatically and can decide to make their next car more economical if they expect increasingly pricey fuel. It would indeed be tough on consumers to be hit with a tax increase in one big step.

      As for bio-fuels, I think algae is great, but there still seems to be more research needed in order for it to be a stable fuel source. But fuel crops, I am less convinced about as they present an opportunity cost over growing food and have a food price inflation effect. Especially in the USA I dislike corn ethanol, which uses 40% of all corn produced in the country and is not particularly energy dense.

      Finally, EV’s indeed have a stronger or weaker case,depending on how a country generates its power, but it’s not a one-for-one trade off with petroleum. I wrote an article a while back that investigated the CO2 emissions of conventional cars with EV’s. http://www.triplepundit.com/2011/03/driving-electric-vehicle-reduce-carbon-emiss/

  • http://www.TigerGreen.co.uk Alison Tottenham

    As for corn (maize) I agree with you. But having recently seen the film Food Inc. I am horrified at the strangle-hold that 4 – 5 very large companies currently have over American Agriculture. As a person with coeliac disease I need Maize for eating and I do not want GM varieties that produce their own pesticides, thank you! However, as you point out cereals are not really suitable for biofuel production; but algae etc. grown in controlled environments and not requiring arable quality land, are definitely a strong possibility.

    Regarding the hike in gasoline prices, I still do not think that you have made a cogent case for it. The extra payments go to governments who rarely do more than use it to provide more unproductive jobs e.g. UK apparently want to fund a Wind Turbine information centre and a green bank. Neither of these is going to help with the job on hand i.e. to put more wind turbines etc. in place. Arguably just another misuse of tax payers’ money.

  • DavDun

    Dan Akerson is not taking a risky position. He is taking the current Administration’s position and is greatly in the Administration’s debt. If the position were taken by Ford or another car company that had not been bailed out by the Government, the position would have more credibility.
    It is true that higher gas prices will force the issue, but that is regardless of the significance of the issue. Although there is consensus that man has a significant effect upon climate change, there is also consensus that man doesn’t have a significant effect. Man does significantly pollute the environment and some of the current green solutions (e.g., heavy metal batteries for electric cars, mercury-laden CFLs) may be a cure that’s worse than the undecided affliction when full life cycle is considered (i.e., manufacture to disposal). Another article in this issue of ENN addresses the 11-year sunspot cycle. The article downplays climate effect for the future and makes no connection to the almost 10 year rise in temperatures around the globe for the cycle that is just ending, but the connection seems more than coincidental.