Tax gas more when it’s low. Less when it’s high.

Gas prices are low.

Really, really low.

But gas prices are also volatile. They can swing—and have swung—by 200% in a few months. What other such omnipresent commodity has such wild price swings? Eggs? Maybe. Gas prices were low in the early 2000s, rose mid-decade and then spiked after Katrina, rose further in 2008 to more than $4 per gallon, plummeted with the economy and bottomed out below $2 in 2009, rose back to $4 by 2011 and have since dropped back under $2.

This is all related to the base cost of oil, variable global demand and long lead times for production. But one thing that doesn’t change with gas prices are gas taxes. If gas is cheap, the tax is the same per gallon. Expensive? Same tax. There’s a pretty good reason that gas is not taxed as a percentage: it would be punitive when prices were high (which can be harmful to the economy) and wouldn’t raise enough money when prices are low. So we have a set tax per gallon.

But it’s not enough. In Massachusetts, the economy is doing well, but is held back by pesky infrastructure. We can’t rest on our laurels, but we seem unwilling to pay for what we need.

The problem is that—especially given the recent volatility in prices—raising the gas tax makes people worry, somewhat rightfully, that the tax will cause high gas prices to go even higher. Sure, gas might only be $1.79 today, but if there were another oil crisis and gas spiked to $4.25, would we really want to tack on another ten or fifteen cents? There’s a very cogent response that, no, we would not: gasoline usage is very inelastic as most travel is non-discretionary. Sure, some people will switch to other modes, and some won’t make trips, but higher gas prices mean that middle-class consumers have less money to spend on other goods. Raising the gas tax when the price is high is akin to hitting consumers while they’re down.

But low prices are just as perverse, for the external effects of gasoline usage. Low gas prices provide little incentive to purchase fuel efficient vehicles, so more consumers buy gas guzzling vehicles, which lead to more pollution, climate change issues, and boneheaded government programs when gas prices rise and everyone cries poor. Gas price volatility is a problem for pretty much everyone.

The gas tax is really different from every other tax. Few other taxes are on a good with a price as volatile as gasoline. Other taxes which we use, in theory, to reduce the consumption of a good (“sin taxes” on cigarettes, for example) can stay high even if prices rise, since there is no economic benefit to easy access to them. Many other taxes are collected as a percentage, but that is anathema for gas taxes as it would only serve to exaggerate price changes. What we really need is a tax that is high when gas prices are low, and low when gas prices are high.

Paul Krugman has cogently argued for a price floor for gas, but this has a couple of issues. It completely disrupts the supply and demand curves with a flat floor, so there is no natural variability in the gasoline markets. Second, if the price of gas rises above the “floor”, gas tax revenues cease; it it rises high enough, a major funding source for transportation dries up. (But, I must point out, one that does not come close to covering the full cost of our roadways; in fact, roadways in most states, including Massachusetts, have a “gas tax recovery” ratio of about 40%, similar to the MBTA’s farebox recovery, so subsidies are about the same.)

Another issue with a floor is that with volatile gas prices, it would mean that the floor price and the actual price would often be quite disparate, and it would have to be implemented on a national scale to keep motorists from having a high incentive to cross state lines. There’s no incentive built in, so it’s harder to sell as having any benefit when prices are high. It also requires all gas stations to charge the same price even though non-gas expenses—real estate, operations—often result in prices which differ by area and business. It’s a blunt instrument.

But what if you split the difference and had a gas tax which rose and fell inversely to the price of gas. When gas is cheap, the tax would be high, providing a sort of moving floor. When gas prices spike, some of the tax revenues could be saved and actually help to mute some of the spike with a rebate: so if the base price of a gallon of gas climbed to $4.50, consumers might only pay $4. I would contend that there is not much difference between gas prices of $1.75 and $2.50—both are considered cheap. Cheap gas is bad, and expensive gas is bad, and volatility is worse. With this sort of plan, when gas prices are low—which often correlate to a more sluggish economy—you get extra money for infrastructure improvements which provide jobs and economic stimulus. When they are high, the effect of the high price is muted somewhat, dampening the effect on the economy of high prices.

Let me put it another way. In the 2015, gas prices ranged from $1.97 to $2.71. Was gas expensive in the last year? No, it was cheap. What if there had been a tax which meant that prices ranged from $2.66 to $2.98? Would gas have been expensive? No, because under-$3 gas is still cheaper than any time since 2011. $3 gas doesn’t kill the economy. $5 might.

Looking back at the last twelve years of gas price data, I’ve come up with an idea which would raise the average gas tax—thus raising revenues for road and transit projects—but would also reduce the volatility of gas prices and, when prices are very high, actually reduce prices at the pump. Note that this is in relation to the Massachusetts state tax of 24¢, but would be just as applicable to the federal 18.4¢ per gallon tax. If the price of gas per gallon is G, then the tax would be:


Note that these numbers can be moved around to increase or decrease the taxes paid, or to change the variability of the tax. For instance, $3/G-$0.70 would yield a tax with more variability; a lower floor but fewer savings when prices are high. But this seems to be a happy medium which matches the experience of the past 12 years well.

As for the costs—going off a baseline of the before-state tax price of gas (take the current price at the pump and subtract 24¢ in Massachusetts):

At $2, this would yield a tax of $1 per gallon and a price of $3
At $3, the tax would be 33¢ per gallon, for a price of $3.33
At $4, the tax would be 0¢ per gallon—a savings of 24¢ per gallon compared to the current tax rate—and the price would be just $4.00
At $5, the tax would be -20¢ per gallon, meaning that the price would be a quarter lower than it otherwise would have been; the price would be $4.80

If gas prices were to drop to $1—and this is unlikely, as it would equate to basically free oil—the system would break down a bit, as the tax would be $3.00 and the price $4.00, so some baseline could be built in (maybe a maximum tax of $1.25). If gas were to spike to $6, the tax would fall to -33¢, so the rainy day fund would be able to pay in to that for a while before becoming exhausted (and the tax could have a provision to readjust when a certain portion of the rainy day fund was paid out). 

Remember when we all had graphing calculators
in high school? Now, theres an app for that.
This graph shows the 4/G-1 (in red) and the 3/G-0.7
(in blue). Note that below $1.50, both increase
exponentially, so a cap would be needed.

Had this sort of tax been in place since 2004, prices would have ranged from $2.76 to $4.01 over that time, rather than the actual range from $1.82 to $4.38. (The 3G-$0.70 would yield a slightly larger range of $2.55 to $4.15.) It would mean a goodbye to very, very cheap gas. But we seem to have survived somewhat higher prices. We even celebrated when gas prices dropped below $3 for “the first time in, like, forever” back in the heady days of—let me check the dateline—October 2014. Having gas prices stay in the $2.50 range, even when the price of a barrel of oil plummets, is not necessarily a bad thing.

There would be plenty of benefits. One would be predictability for auto purchasers. Cars are durable goods, and a single vehicle can last through several oil price cycles. Consumers buying less-efficient cars would have a better idea of what gas prices would be, and they would no longer drop so low that inefficient cars would become (relatively) cheap to operate. And when prices spiked, it would be less of an impact for these consumers. High efficiency buyers would be incentivized to buy cars without the worry that recouping the extra cost for a hybrid or alternate fuel vehicle would be negated by a drop in prices. It would even benefit automakers, who would be able to better plan vehicle models and production schedules knowing that the volatility of gas prices would have less of an effect on consumer choice.

While this tax could be implemented as a revenue-neutral scheme, it would also make a revenue-positive gas tax more palatable. For instance, the tax described above would have averaged 37¢ from 2004 to 2015, during which time the gas tax in the Commonwealth was 21.5¢ (21¢ for 10 years, 22¢ for two). The gas tax in Massachusetts raises about 38 million dollars for every penny it goes up (and an average increase of 10¢—just 5% of the volatility in prices in the past decade—would be very unlikely to bend the demand curve significantly) so raising the tax from 21.5¢ to 37¢ would have raised a net of $7 billion dollars. That includes money for the rebate drivers would have received in 2008, when the tax would have been -9¢. That certainly would have been beneficial to the economy, which was already teetering on the brink for a variety of reasons, and certainly wasn’t helped by $4.50 gas.

There are some issues to this scheme, but they would be surmountable. First is that if the price of gas was consistently high, the tax—and the necessary revenue—would disappear. So any such tax would need a set amount that the rainy day fund would pay out and a specific criteria to recalibrate the tax towards a new baseline. If there were a few years of cheap gas, a months-long spike wouldn’t be an issue. If gas prices spiked for a long time, the tax would have to rise, but could keep the same adjustability provisions. (Why not set it to inflation? There are two issues. The first is that gas and inflation correlate very little. The second is that gas prices are part of the inflation, so if gas prices go up, inflation goes up, and this, if anything, causes a feedback loop.)

Another issue is that if prices are a lot higher in one state than in another, people are going to cross borders to buy cheaper gas. This would be an issue, but not a huge one. There are already disparities in gas taxes between states, although Massachuetts’ population is generally concentrated away from borders, and the distance that it’s worth traveling to save money on gas is relatively small. People are also more likely to feel the pinch of prices and try to avoid them when overall prices are high, and when prices are relatively high—above $3—the price disparity would be relatively small. And when gas prices are high, this gives the state an economic advantage, as residents would have more disposable income for other purchases. (You could even allow some gas stations very near the border to opt out of some of the increase in the tax when the prices were low, but they’d also have to give up the tax rebates when prices were high.)

Why not use a Vehicle Miles Traveled tax, or a VMT? There are variety of reasons. First of all, a VMT does not have the benefit of encouraging people who do need to drive to drive smaller cars, which this would. Second, it would be harder to sell a VMT than a gas tax, as there is a vocal minority of citizens very worried about the government tracking their movements (note to the tin foil hat crowd: that ship sailed a long time ago). The gas tax works. The main issue is that since it is so rarely raised, it has lost the purchasing power it needs

The idea of this plan is to pair a gas tax increase with the sweetener that, when the gas tax is most perverse and regressive, the pain would be muted. This has the potential to appeal to a wider portion of the population, because everyone remembers high gas prices, and it would actually help to reduce those spikes. We certainly need to increase transportation funding. The gas tax is a good tool, but we need to think outside the box and figure out how to make it work better, no matter the price of gas.

Would this work politically? There’s no way to know. But it would diffuse the argument that if we raise gas taxes and then prices go up, it hits low- and middle-income families hardest. This would actually give a tax break to motorists at times of high taxes. Maybe that would be a rallying point and a compromise to get the funding that we need while reducing the adverse impacts of the volatility of gas prices.

Mass. gas taxes lower than region, nation; parity would go a long way

I drove out to Syracuse over the holidays. When I filled up with gas in Massachusetts, the going rate ranged from $3.30 to $3.45, at least outside of downtown (where the cost of land and logistics raise the price somewhat). In Syracuse, however, most stations were in the $3.60 range, and I held my nose (although not too hard; I had borrowed a Prius for the trip so even a full tank ran under $30) and filled up.

And I got to thinking: why is gas in Massachusetts so much cheaper? I know why it’s cheaper than New York City, where gas stations take up precious land and you can’t build above them (because how scary would it be to live in a building sitting atop a bomb)? But upstate? Does delivery cost more? Are there some extra regulations in New York and not Massachusetts? Is the gas tax higher?
Oh, right, the gas tax is higher.
Massachusetts has a middling gas tax of 23.5¢ per gallon, 24th lowest in the country (and it hasn’t gone up in more than 20 years). New York’s tax is the highest in the US, more than doubling Massachusetts at 51.3¢. (Here’s Wikipedia on gas taxes by state including the federal 18.4¢ tax). New York’s economy seems to get along fine, and the gas taxes assuredly help New Yorkers fund their transportation network.
But Massachusetts lags even the national average of 27.5¢ per gallon. Gas prices are relatively well-correlated to state population (but, surprisingly, not by population density; see charts at the end of this post), so small, low-tax states skew this mean. Weighing the average by population shows that the average American pays a gas tax of 32.1¢ per gallon.
What about the region? How does Massachusetts compare against its neighbors, if not the whole country?
New York 
Rhode Island
New Hampshire
Except for Live Free or Die New Hampshire, Massachusetts’ neighboring states pay higher gas taxes. Even in rural Maine and Vermont, where there are few transit options, gas taxes are higher. New York and Connecticut have dramatically higher taxes (putting thems in the top-10 highest gas tax states). Massachusetts seems like an anomaly here with lower gas taxes despite higher-priced neighbors and a transportation system which desperately needs the money.
The average in the region? 34.5¢. The weighted average? 46.7¢ (New York accounts for 71% of the population; Connecticut another 13%.)
Now, what would an increase gas tax would raise in Massachusetts? Last year, the MAPC put out a great MBTA budget calculator to try to close the gap in T funding. By their estimates, every 1¢ rise in the gas tax nets $27.7 million per year. Since even a 25¢ rise only accounts for a 7% rise in the overall gas price, we can assume that the gas tax wouldn’t decrease demand for fuel dramatically (demand for gasoline is quite inelastic). So here are some scenarios:
  • Match the national average of 27.5¢. Annual revenues: $110 million.
  • Match the national weighted average of 32.1¢. Annual revenues: $238 million.
  • Match the regional average of 34.5¢. Annual revenues of $305 million
  • Match the regional weighted average of 46.7¢. Annual revenues of $656 million
  • Match New York’s gas tax of 51.3¢. Annual revenues of $770 million
What if we raised the gas tax by 15¢ per gallon over three years—a nickel per year—and then did something really smart and indexed it to inflation? First of all, we’d still a ways from the top of the list of states by gas taxes. Three years out, we’d have somewhere along the lines of $400 million in additional gas tax revenue per year. I see this splitting in to five pots:
  1. MBTA operating subsidies. This could be 5¢ per gallon, although such a static cap could lead to issues if tax revenue lags like sales tax revenue did in the current budget predicament. Still, if there isn’t a huge debt transfer to the T (like there was in 2000) it would be less of a concern. (This 5¢ could also go towards Big Dig debt repayment, or that could come out of other portions of the tax.)
  2. RTA operating subsidies. 1¢ per gallon. Massachusetts regional transit authorities provide transit service to many cities and towns outside of the Boston area, and dedicated funding could allow them to improve and add service, as many operate limited schedules on only some days of the week. (The RTAs have less than 1/10th the ridership of the MBTA, so this is a higher per-rider subsidy and would help bring the votes of legislators from further afield.)
  3. Transit infrastructure improvements and projects. 4¢ per gallon. This money could probably be used to leverage private, local and federal funding.
  4. Highway infrastructure improvements and projects. 4¢ per gallon. This money would also probably help to leverage matching federal dollars.
  5. Bicycling and pedestrian improvements. 1¢ per gallon. It’s a small chunk of the puzzle, but $25 million per year would go a long way.
State policymakers in Massachusetts seem to realize that something has to be done about transportation funding. In the midst of the recession, business leaders called for a 25¢ gas tax hike. In 2009. 25¢ would give another $300 million per year for things like infrastructure improvements and debt payments (although it would still fall short of some estimates of the need for infrastructure improvements). This is the kind of sensible changes that we will need in order to have a functional transportation system. And if we look to our neighbors, we can see that, despite concern trolling (this article has a sad story about a guy filling up his wife’s Lincoln Navigator who might get hit for $500 a year—but apparently can afford to own and drive a 16 mpg Navigator) that always bubbles up when the gas tax is mentioned, raising the tax enough to begin to pay for our transportation system is certainly feasible.

As mentioned above, here’s a chart of gas taxes by population and density:

A quick note on Vehicle Miles Traveled taxing, or VMT: it may be a more palatable alternative to gas taxes, but it’s bad policy. First of all, it would require significant infrastructure to require people to have their odometers read, probably at a state inspection. It would also incentivize people to register their cars out of state, which is not a particularly difficult thing to do, especially for a state with a lot of migration in and out. Finally, a VMT tax disincentivizes driving, while a gas tax pulls double duty and discourages driving and the purchase of larger, less efficient vehicles. In other words, there is no logical argument for a VMT over a gas tax.

Can we leverage the oil slick in to a gas tax?

We’ve written about the gas tax before (or the lack thereof). But with a new focus on the perils of offshore drilling (and oil spills in general), it seems that it might be a good opportunity to impose, and properly frame, the gas tax.

As Jonathan Chait (and surely others) adroitly points out, we are not paying for all of the externalities. We’re definitely not paying for the rather obtuse problem of carbon dioxide and other greenhouse gases. There are ideas on how to put a price on it (a carbon tax), but none are particularly sellable. Despite the rather dramatic evidence, global warming is a hard sell. Yes, it’s one degree warmer than it was, but there are still cold snaps and snowstorms. Try to convince the public that it’s a problem, and you’re bound to run in to contrary “evidence”, even if the evidence is weather while the problem is climate.

In any case, to impose a tax, you often need a good reason. And the oil spill—as bad as it is in the affected area—might be a good enough reason. Yes, we all want BP to pay for the damage. But, likely, the government will kick in, or at last have to pay first and go after BP later. Here’s where the framing comes in. Instead of a carbon tax (which we don’t understand) we need a “save the birds and marshes fee.” Show a bunch of oil-slicked birds, and put a 5¢ fee on each gallon of gas. Because when it happens again (and, oh yeah, it’ll happen again), we’ll either have more money, or fewer oil tankers and rigs. Neither of which is a bad thing.

Re-imagining a gas tax chart

There was an interesting article on The Infrastructurist a few days ago about the gas tax. It poses the question of whether user fees might be a better idea (my thought: way to complicated to get the same result). And they show a chart of the gas tax since its inception in 1932:

That’s interesting, but, well, wrong. If you look at this chart, it sure looks like the gas tax keeps on rising. Look, it’s gone up 450 percent since 1982! The government just wants our money! We can’t raise the gas tax (seriously, we can’t, it’s a third rail). But it’s not really rising.
Once in a while, we need money. And we raise the gas tax. On the chart below, the blue line is the same as the chart above—see how it rises? Now look at the red line. That’s the same value—except adjusted for inflation. Once adjusted, the gas tax has varied, from about 9 cents to about 29 cents, in the past 80 years. 
It’s interesting when it was raised: first in the 1950s (when the Interstate system was funded) and then in the 1980s, after the oil scare. And if it seems like it’s taken a while since it was last raised, look at 1959 to 1982, when it went from an inflation-adjusted 29 cents to an inflation-adjusted nine. If we wait that long, it will take until the end of this decade to raise the gas tax—and it still won’t fall as far as it did in the late 1970s unless we have dramatic inflation again. So, yes, the gas tax should go up. But, no, it’s not at a historically low level. However, we haven’t really raised the gas tax, well, ever. We only raise it as a reaction to it being too low. (Gas tax data from here, inflation data from BLS)
Quickly, why is the gas tax good? Well, first, why is it bad? It’s regressive. Everyone pays the same. But why is it good? Well, in addition to raising revenue, it has tons of positive externalities. It taxes heavy users more than light ones (and people without cars get off scot-free). It encourages people who need to drive to buy smaller, more fuel-efficient automobiles. It encourages people to move to areas where they don’t need a vehicle, which are inherently more efficient. Less petrol consumption means less pressure on us to buy oil from unstable, foreign nations. It’s very economically sound: you’re not forcing anyone to do anything, but you are able to affect change simply through taxation. And, finally, it’s really, really hard to get around. Smuggling gasoline is hard, and gasoline is bulky and dangerous to transport. Drugs and cigarettes are easy to sell on the black market. Gasoline? Not so much.
I’m sure we’ll get to the gas tax more in the future. But, for now, remember this chart.
(Yeah, I know I haven’t been posting here in a while. Skiing has gotten in the way.)

Cash for clunkers: proof that a gas tax would work?

There has been a lot of debate as to the overall efficacy of the Car Allowance Rebate System, (legislators love acronyms) colloquially known as “Cash for Clunkers.” On a few subjects there isn’t much contention: it has been “successful” in getting people to buy new, and generally more efficient, cars. In other words, if people have a financial incentive to trade up to a more efficient car, they will do so. Especially if the incentive is (probably) set too high.

So, I’m not down on Cash for Clunkers. First of all, it’s proof that a government program can work. It was quick and effective and probably stimulative (more so than environmental)–most of the cars in the program were made in the United States. That’s good in that it may help convince some anti-government types that government is not always the problem. Second, it is not increasing the number of cars on the road. While it is certainly not perfect, a far more worrisome development would have been a program that mailed out checks to people to buy new cars; a program which I could see government embracing. Third, it can’t be debated that the new cars on the road are, in fact, less polluting than the current ones. While not everyone went out and bought the newest Prius (although many are), a 60% gain in efficiency is nothing to scoff at. Even if these cars may be driven more than their predecessors (since they’ll be new and reliable and, well, not clunkers) there will likely be an overall decrease in emissions.

On the other hand, the program could have, obviously, been better administered. First of all, $3500 to $4500 is a lot of money. I thought about buying a clunker, trading it in, buying a new car and turning around and selling that–even with the title transfers, time involved and money lost to depreciation, I’d probably clear a couple grand. (I’m not sure, however, if I could have qualified with a new-to-me clunker.) In any case, smaller sums–$1000 to $2000–would have likely resulted in many sales but not the veritable run on the bank that car dealers have recently seen. In addition, there was no provision for people with clunkers who wanted to get out of car ownership completely. The only way they could do so would be to trade in the clunker, buy a new car, and turn around and sell it. Maybe the next program should be that if you bring in an old car, the government will give you a year-long transit pass for the agency of your choice and a $1000 credit for your local car sharing agency. This, too, would cost less than $3500, and dramatically reduce emissions and the number of cars in the road. (Yes, I have a bit of a vested interest in the second half of this proposal.)

While the transit-car sharing idea is a bit of a pipe dream, politically, one which is less of one would be a better-graduated system. The CARS program had hard cutoffs. If you car gets tenth of a mile per gallon over the limit, you get nothing. A tenth less and nearly $5000 can be in your pocket. Furthermore, you get this money whether you upgrade to a still-overpowered sedan or SUV getting in the low 20s or a Prius (or similar) getting twice that. So what would make more sense would be a graduated system. Trade in an 18 mpg car and go to a 22 mpg and we’ll give you a few hundred dollars for your trouble. Go from a 14 mpg SUV to a Prius (or a similarly “clean” car), and you can cash in on the full $4500. Or more.

That’s all well and good and probably won’t happen. Nor will credits for transit commuters, cyclists and others who choose not to drive. It costs too much money and isn’t terribly stimulative and probably doesn’t have the votes. Furthermore, the CARS program was very simple. Your vehicle either does or does not qualify, and you can get either $3500 or $4500. For these others, we’d need charts. And if you put mathematics in between an American consumer and a deal, they’re far less likely to do it. In other words, if you make it as confusing as doing your taxes, people are going to like it about as much.

There is a relatively simple way to achieve nearly all of these objectives. It would require little administration, since the methods of collection and distribution are already in place (and have been for years, and work fine). Yet, for a variety of reasons, it is a political third rail. It is, of course, the gas tax.

The federal gas tax is 18.4 cents per gallon. That’s right. 18.4 cents. Most states have their own taxes on top (Alaska is the only holdout) raising the total tax as high as 60¢, in New York State. The federal portion was last raised in 1991. Yup, 18 years ago. Since then, prices have increased 58%. Had the gas tax kept up, it would be 29¢ today. The gas tax in 1991, however, accounted for about 17% of the cost of a gallon of gas (at that time, gas, with the tax, cost about $1.20). If gas taxes were based on percentages, they would be about 43¢, and last summer would have crept to nearly 70¢.

So, it’s obvious that gas taxes are low. And it’s also pretty obvious that there is some climate stuff going on, and that having people use less gas would be beneficial. In addition, using less gas would keep prices lower and supplies more stable, as well as encouraging energy independence. These are all good externalities, but, perhaps most importantly, the gas tax, if it is adjusted for some rural populations and low income communities, is a very efficient way to raise tax revenues.

Mention raising the gas tax and you’ll hear two responses. One is “it’s not politically possible.” The other is “it’s regressive.” The first is, sadly, perhaps true. The second is not, and, particularly when it is offset with some sort of tax credit, potentially a straw man. When the tax was last raised, 18 years ago, this was debunked. In several manners, it has to do with how you look at gasoline: whether it is a necessity or a luxury. If it is a necessity, then, yes, the tax is likely somewhat regressive. This is the reason we don’t place punitive taxes on clothing and food: you need both to survive. Gasoline, however, is a different story. In New York City, 55% of the residents do without a car. Yes, it’s a special case. But is there anywhere where more than half the residents do without food or clothing? In several other major cities, more than a quarter of households don’t have cars. For some it is an economic decision. For others, it is about lifestyle. But it is rather obvious that, especially in areas with decent public transport, owning a car is not a necessity.

And for these people, which number in the millions, a gas tax is not regressive at all. Many of them are the same people who the highway lobby defends; the people for whom a gas tax will be painfully regressive. However, as long as they aren’t driving a gas tax will have no effect, although it might drive more people towards transit use and increase service levels.

The other worrisome issue are those people who live in rural areas. For them, higher gas taxes will result in higher costs, because living at a low density tends to require a lot of driving. And for farmers, a rise in gas prices will create a rise in production costs, for both mechanized agriculture and transportation. There are two ways of dealing with this issue. One is direct subsidies to growers to buy cheaper fuel, although such a system would be fraught with fraud and inefficiencies. (If we’ll sell you 10 gallons of cheap gas, is there much of an incentive to economize and only use nine?) A simpler way, of course, is to pass the costs along: food prices might rise a bit, but everyone would have increased costs, and everyone would pay. In addition, there would be a fine incentive to save fuel, which would both reduce costs and be more environmental. For those who live rurally for the lifestyle, they’ve made a choice to live a car-dependent (and fuel-dependent) lifestyle. It’s only fair that they pay more.

Finally, there is a way to make sure that a gas tax would both not hit the poor especially hard and be stimulative as well: return the extra money spent on gas, in advance, as a tax credit. Estimate the amount of gas used per year (recently about 140 billion gallons) and the amount of money that, say, a $1 gas tax increase would raise (with less use, about $120 billion). Knowing that that revenue increase was in store, the government could turn around and write a $500 check to every tax payer in the country at the beginning of the year. A nice letter could be enclosed:

We know that we’re increasing your gas tax. Here’s $500. If you need it for gas, use it for gas. If you want to buy a more efficient car, here’s some help to buy a new car. If you are interested in local transit service, here’s a website where you can find out more. Here’s information about car sharing, car pooling and other fuel saving techniques, too.

Oh, and enjoy the $500!

People worried about fuel costs could save the money for the year. Many others would spend the money in ways that would stimulate the economy. Others would, in the face of higher gas prices, use it for transit passes. And it would be a very progressive tax rebate: it would benefit those at lower income levels far more than those at the top.

In the long run we might, as a society, want to use this money to fund more effective transportation policies. Maybe the amount would decrease by $50 a year as people got more used to higher taxes, by driving more efficient vehicles or driving less. Any extra money could be put towards funding expansion and operation of transit agencies, and building new energy and transportation networks (as the current gas tax is earmarked for transportation). In the short run, as has been discussed in several places (including liberal blogs), consensus is that we can’t get everyone out of their cars tomorrow. But instead of expanding the Cash for Clunkers program, and making it more top-heavy and unwieldy, a gas tax would likely give us better results with easier implementation (since it’s already implemented).

And if everyone were promised a $500 check from the government, it just might be possible.