A Modest Proposal - More (Gas) Taxes!

May 27th, 2009 by 


On March 19, 2009 President Barack Obama issued guidance to car companies... in 2016 car companies will have to adhere to new restrictions on fleet miles per gallon.  Specifically, cars will have to average 39 miles to the gallon, and trucks 30.  The goal of the program is to reduce the United State's dependence on foreign oil and reduce greenhouse gas emissions.  Assuming those are reasonable goals, is this the best approach possible to achieve them?  If it isn't, is there another way to achieve the goals?


Contrary to popular opinion, most of the oil in the United States is not imported from the middle east.  The top three suppliers to the United States are Canada, Mexico, and Saudi Arabia.  These states can safely be classified as allies.  A sizable amount of the oil used in the United States, 42%, is also produced here.  Regardless, 58% of the oil used in the United States is imported, and perhaps reducing this dependence is a good thing... you be the judge.


CAFE regulations, (or "Corporate Average Fuel Economy") started in 1975 to set standards for the efficiency of vehicles under 8500 pounds gross vehicle weight.  The standards have been changed numerous times over the last 34 years, culminating in the current standards of 27.5 miles per gallon for cars and 23.1 miles per gallon for trucks.  CAFE sets a harmonic mean that car manufacturers have to meet in order to avoid fines.  CAFE is based on the cars and trucks sold by manufacturers; this inherently links the average economy to customer demand.  There is no corresponding penalty or incentive for consumers to purchase more efficient vehicles (with the notable exception of hybrid vehicle tax credits).

What About The Gas Tax?

The U.S. currently levies an 18.4 cent gas tax.  Additionally, the states impose additional taxes on fuel, bringing the average to 45.6 cents per gallon.  The gas tax is an established program that the government could use  to spur demand for small, efficient cars which get better mileage.

The current system of forcing car companies to make cars that don't have the demand to sell is unsustainable.  Large cars, while more inefficient, are safer and more comfortable for the average American driver.  European tastes for smaller cars don't translate well to the American market.  In Europe, higher gas prices first drove the market for diesel vehicles, followed by a 'race to the bottom' for smaller cars.  Only in Europe could the Mini Cooper and Smart ForTwo have been designed...
However, the gas tax is a mechanism the government could use to increase demand for more efficient vehicles.  Over time, a higher gas tax will lead consumers to choose more efficient cars and to buy the cars the car manufacturers are forced to make.  Only some sort of incentive (or disincentive) will cause consumers to choose the CAFE mandated vehicles.  Simply supplying vehicles without demand will leave a lot of vehicles unsold.

You Can't Be Serious...

Yes, I'm serious.  Gas prices, driving behavior, and vehicle purchasing decisions are inexorably connected.  Increases in gas prices lead to less driving and eventually.  Last summer, $4.00 was a major talking point.  For the first time in years the number of miles driven in the US actually decreased.  Efficient vehicles like the Toyota Prius sold off of dealer lots.  Now that gas is back under $3, (but rising quickly...) there is a large dealer backlog of efficient cars.  How quickly consumers forget...

A Modest Proposal

Many people, some of them in curious positions, have come out in favor of the gas tax.  Holman Jenkins of the Wall Street Journal commented on this very issue, quoting Bill Lutz heavily.  Mike Jackson, the CEO of AutoNation, has been very vocal on this issue... see Carol Loomis's article.

If congress is (as) serious (as me) about making CAFE a sustainable program, putting a floor under the price of gasoline is the best way they can do something about doing that.  CAFE is a joke... a program that merely picks on the politically weak car industry as a victim instead of imposing new taxes on a possibly reluctant population.  However, this is not an "If you build it, they will come" situation.  There are taxes on alcohol and cigarettes, with many studies showing that consumption of them decreases when taxes increase.  If gas usage is to decrease, it only makes sense to raise its price until that happens.



PK started DQYDJ in 2009 to research and discuss finance and investing and help answer financial questions. He's expanded DQYDJ to build visualizations, calculators, and interactive tools.

PK lives in New Hampshire with his wife, kids, and dog.

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