Of Gas Subsidies and Taxes (and the Environment!)

Should I worry if I find myself agreeing with a Ford executive – Bill Ford, to be specific – on the topic of American fuel standards and consumption?  Sure, he may have different motives than I for wanting the government to tax gasoline, but in the end we might all win out through a higher tax on gas.[1. We currently pay around an extra 30 cents a gallon - paltry compared to Europe's $1-$2 per gallon.  And with projected subsidies at over $4 billion from now 'til 2015, as well as American expenses in guarding shipping lanes at around $19 billion, and the billions we just give away to big oil every year through the Mineral Management Service (a branch of the Interior Department), it's hard to determine just how much we're being taxed and how much is being subsidized.]  European governments already augment the price of every fill-up; it’s very tempting to say that if the United States engaged in similar practices, we would experience a twofold benefit.

1. Though gasoline is a valuable commodity, it’s still subject to the elasticity of demand in that, if the price of gasoline goes up, many will find ways to do without it.  If the government were to raise gas prices by taxing it at a higher rate, many would be forced to look for alternative sources of transportation, travel more sparingly, or – as B. Ford says – buy more fuel efficient cars.

   While this is an admission that consumers won’t change their ways without interference, it’s not far from the truth.  This notion is supported by recent statistics showing relationships between increases in gas prices and  increases in use of public transportation followed by decreases in automobile traffic.  When prices go back down, public transportation use goes down, and automobile use back up.[2. See, more specifically, NYT Article Gas Prices Send Surge of Riders to Mass Transit, and again NYT As Gas Prices Go Down, Driving Goes Up. While these things may seem like common sense, it's always good to have some sort of support to back up your claims]

   Further, increased tax revenue from gasoline could be diverted to supporting green projects that increase fuel efficiency, thus ultimately benefiting the taxpayer.  While this is far from the goal of tax increases, one must acknowledge its great potential as a side-benefit.

2. Tax increases on gas could actually lower oil company profits.  Going back to our example of elastic demand, we must again assume that consumers are only willing to pay X for a certain commodity before demand begins to go down.  Oil companies, and all companies, have complex matrices that show them exactly where they can make the most profit while maintaining a certain level of demand through price control.  If, however, governments add another variable to the equation that increases gas prices beyond the oil industry business model, they’ll be forced to lower their prices in order to maintain a level of demand that maximizes their profits.

   This would put extra money in the government’s coffers while taking it away from oil organizations that have been making a killing on sales, especially recently.

Of course, this is an oversimplified way of looking at our current situation.  Yet, the basic principles remain true; increased gas taxes have the potential to change the way we approach transportation in this country while giving us the ability to put more cash into R&D projects for alternative energy.  The bottom line is that our current approach to fuel management in this country does not work well.  Not for the auto companies, not for the American taxpayer, and not for the environment.

This entry was posted on Wednesday, April 22nd, 2009 at 12:56 am and is filed under Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.