Dec 262008

A few weeks ago Gordon Smith at the Conglomerate referenced a proposal floated by Alan Sloan in the Washington Post, which in broad terms basically encouraged a tax on oil to make up for the current dip in prices. Gordon seemed to pan the idea as silly, and indeed, perhaps the way Sloan proposed it, Gordon might right. I don’t care, though, because instead of reading Sloan’s piece I decided to rethink the idea for myself, and in doing so, I’ve decided there’s some merit in such a tax.

The tax I’m contemplating would apply to gasoline only, not crude or oil’s other applications, like heating oil. I think one runs into completely different policy values when deciding how much money it should cost people to fuel their cars than to heat their homes. Which is not to say the two are unrelated — in a functioning market demand for one should affect the price of the other — but, as Gordon noted, oil is not a functioning market, and as a result it is both appropriate and indeed necessary to approach its various applications separately.

Where I unexpectedly stirred up in controversy was in stating one of the basic propositions behind my thinking, that gasoline right now is a “bargain.” For this apparently blasphemous statement I got attacked by a few commenters, commenters who seem unlikely to ever support any tax on anything. Admittedly, I, too, look askance at a lot of consumption taxes because they tend to disproportionately affect people of different income levels. But implemented in a targeted, meaningful, and limited way, I think they can be appropriate, not just as a source of public revenue but also a necessary shaper of further public and market behaviors.

What I meant by “bargain” is that, right now, in California, in the Bay Area, I can buy gas for less than $1.80/gallon. Given that just this summer it was costing more than $4/gallon, current prices are indeed, “a bargain.” Now, $4/gallon was definitely too much and the economy strained under those prices. But in the $2/gallon range, things were fine. People might have been grumpy about it, but personal and business budgets largely seemed to accommodate those kinds of prices without needing to pass them along to the bottom line. So I proposed a tax that would raise the price from its current “bargain” level to, say, $2.50.

The advantages would be many. For one, it would collect much needed revenue. Especially as the public fisc becomes more and more strained, revenue has to be generated from somewhere. And here is a source of funding where history has shown the cost can be reasonably well-borne without causing macroeconomic injury. If the economy could hum along while enriching oil companies that extra $.75 or so, then it surely could hold itself together when the government gets that premium. In fact, maybe it could even do better, as the government is more likely to put that money back into the economy in more productive ways than the oil companies were anyway.

Secondly, the tax could be temporary. One of the problems with gasoline prices is that their fluctuations, more than the ultimate prices themselves, tend to be so damaging. As an essential commodity it is stuck being just as essential despite the price shifts. Demand cannot adjust nearly as quickly as prices do, at least not without sharply reshaping economic activity elsewhere. So this tax could provide a cushion, which could gently withdraw as underlying prices once again rise. In other words, if the economy can bear $2.50/gallon, then as the underlying retail price approaches it, the tax could lessen, leaving consumers to still pay the $2.50 price they were inured to without any sort of price shock.

It should be noted here that I’m not wedded to the $2.50 price itself. I chose it based on my general memory of how things seemed to function in California during different price points. However before any tax is imposed studies should be done to calculate what the appropriate price point should be: one that is generally economically affordable but causes just a slight bit of economic pain.

For that’s another reason supporting the tax: in the long run we will all be much better off — not just economically but also ecologically — if our overall gasoline consumption were reduced. Which would mean that our habits and our vehicles would need to change to something more fuel efficient. But as history has shown us, neither do change unless and until it becomes economically necessary. So that price point should be set in such a way that fuel efficiency does seem economically necessary in order to drive the long term change to fuel consumption our world needs to see.

 Posted by at 10:00 pm

  3 Responses to “A taxing argument”

  1. What would keep all of the retailers from just always setting their price at $2.50? A price floor sounds like a gift to the oil industry…

  2. What does keep retailers from setting it at that price already?

  3. Competition…
    Now, an oil company can lower the price at a store, making it’s price lower than competing stations and leading to competition. (and drawing in customers who seek out the lowest locally available price).
    Under your proposal, any retailer who decreased the price below the floor would be benefitting the state, not customers so a price drop would not draw in customers, but only cut off potential profit.
    Thus retailers would not have any motivation to dip their price below the floor, and the tax would not benefit customers (who would always pay at least the floor price and no less) or the community (as no tax revenues would be realized).

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