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September 29, 2005

Tax Shifting in the Blogosphere

Not so long ago, it seemed like gas at $2.33 per gallon cost an arm and a leg; now it seems like a bargain.  And not surprisingly, high prices at the pump have spawned a backlash against fuel taxes across the US -- and have added fuel, so to speak, to the campaign to repeal Washington's most recent gas tax hike.

As a general matter, I think that responding to high gas prices by rolling back taxes is misguided.  The specifics get murky, of course, since a lot of the money raised by gas taxes is slated for dubious highway projects--so a vote for higher gas taxes isn't always a vote to reduce gas consumption.  But in general, gas taxes are too low, not too high:  right now, they don't even pay for roads, let alone incorporate all of the other external costs (pollution, greenhouse gases, noise, collisions, congestion, etc.) caused by driving and burning fossil fuels.  A stiff & sustained gas tax would do a lot more to reduce gas consumption than all the preaching in the world.

Still, even though I tend to favor higher gas taxes, one thing is clear enough:  gas taxes are regressive.  Like high gas prices, they hurt the poor the most.  Which, if you care about fairness and equity in the tax system, is a bad thing.

The question is -- as a matter of policy, what do you do about that?

For years we've advocated tax shifting--that is, raising taxes on gas, but lowering other regressive taxes, such as the sales tax.  Depending on how you structure it, you could actually wind up reducing the total tax burden on the poor, while still creating across-the-board disincentives for gasoline consumption. 

It seemed like a completely reasonable idea when I first heard about it -- but I hadn't heard many other folks making the same argument.  So I was pleasantly surprised to see similar thinking starting to echo around the blogosphere:  see, for example, here and here, along with a reference to this pdf.   

Here's hoping that this is an idea that keeps echoing.

Posted by ClarkWD | Permalink


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As the supply and demand drives the cost of crude oil well above the cost of production (as happens with any scarce commodity), it would seem that taxing crude oil would only cut into the profits of the crude oil producers. Is this right, or am I forgetting something from my economics class?

I've also read of an alternative taxation method that has been proposed by legislators that would tax the profits of oil producers; perhaps this would be easier to enforce. And if successful, perhaps it could be extended to other scarce commodity industries...especially for those that sell non-renewable resources.

Posted by: Rodney Rutherford | Sep 30, 2005 8:05:18 AM

Rodney --

Interesting thoughts. I don't know how I feel about windfall profits taxes. I'm not opposed in principle -- I'm willing to consider just about anything. It's just that I don't understand the effects well enough to have an informed judgment. I should read up on what happened in the 1980s, when the US levied steep taxes on oil profits.

One of the possible problems now is that most of the oil consumed in the US comes from outside the country -- and taxing the profits from, say, Saudi oil is essentially impossible.

Taxing profits on domestically produced crude seems more feasible. But those profits provide the stream of capital for new oil exploration and extraction projects. Now, I don't think that reducing oil exploration is inherently a bad thing. But it is likely to make market prices rise, rather than fall.

A demand-side tax would affect all oil, both domestic and foreign. And by reducing consumption, it could slightly ratchet down the market price for oil -- cutting into oil companies' profits a bit, but affecting domestic and foreign oil equally.

Both approaches might make sense; a demand side tax would be easier to implement, but harder to pass; a supply side tax could have more perverse effects, and seems like it could be a nightmare to implement, but is probably less of a political nonstarter. Though I don't expect to see either proposal enacted any time soon.

Whatever. This is all off the top of my head, so take it for what it's worth...

Posted by: Clark Williams-Derry | Sep 30, 2005 10:26:25 AM

Some thoughts on the cap-and-trade option:

Posted by: Joseph Willemssen | Sep 30, 2005 11:10:39 AM