NCPA - National Center for Policy Analysis


February 4, 2009

The conservative media has started promoting the idea of raising gas taxes under the assumption that if fuel becomes more expensive, we will use less of it, thereby reducing funding for hostile regimes, stimulating the development of new technologies and ameliorating global warming.  The idea is appealing, after all, if we have to tax something, why not tax gas instead of income?  But nothing is ever as easy as it seems, says Jim Manzi, senior fellow at the Manhattan Institute.

A major problem with trading a gas tax increase for a reduction in payroll taxes is that Federal Insurance Contributions Act (FICA) tax rates -- which fund Social Security and Medicare -- have had to rise to their current levels for compelling reasons, says Manzi:

  • In 1950, the FICA rate was 1.5 percent; by 1970, it was 4.8 percent; by 1990, it had risen to its current rate of 7.65 percent.
  • It has been stable for about two decades, but meanwhile the programs that it funds are in crisis.
  • We would have to maintain the higher gas tax for decades in order to generate the consumption reductions that advocates argue will occur, but it's not likely we will be able to resist the upward pressure on FICA taxes for anywhere near that long.

A $1-per-gallon gas tax is very unlikely to reduce gasoline consumption enough to defund our enemies or to have any serious effect on the theorized global warming, says Manzi:

  • Finished motor gasoline accounts for about half of U.S. petroleum use and the United States consumes about 25 percent of global petroleum, so we are talking about a reduction in global demand for oil on the order of 20 percent times 50 percent times 25 percent.
  • In short, 2.5 percent, 10 to 20 years from now.

Finally, such a tax is very unlikely to stimulate the development of new technologies.  Western Europe is a huge potential market and its gasoline prices have generally varied between about $3.50 and $7.50 per gallon over the past decade.  How would gas at $2.65 per gallon in the United States induce new technologies when much higher prices in Europe do not, asks Manzi?

Source: James Manzi, "And Global Warming Too!" National Review, January 26, 2009.

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