An Increase in the Gas Tax!?

Some members of congress want to add an additional 5.45 cents a gallon to our already soaring gas prices for the first year, and then adjust the price according to inflation each year.  This will be an additional tax imposed on gasoline…on top of the current one.  They say they want to do this to finance more highway and transportation projects, which will benefit the economy.  The Center for Data Analysis at the Heritage Foundation says that increasing the gasoline tax would “depress economic activity and the incomes of millions of Americans. 
President Bush is standing firm against any increases in taxes including this one because he knows that the best way to boost the economy is not to tax more so that you can create more jobs for the short-term, he knows that if you tax less, people have more money to spend, which will buy more goods and services from producers, which will hire more people to keep up with the demand, which will create more jobs for the long-run without governmental interference.
If this gas tax were to be imposed, “personal savings would average $8 billion less per year from 2005 to 2014. $82 billion of the $131 billion increase in federal revenues over 10 years would be financed out of foregone or lower personal savings.  Gross Domestic Product would decline by $6.5 billion per year, in real terms, from 2005 to 2014. In other words, this $131 billion in government revenues would shrink the economy by $65.5 billion.  There would be, on average, 37,000 fewer job opportunities each year. That works out to one lost job for every $351,000 in new taxes, which is equal to 11 years of work at average yearly wages.  Total federal revenues would fall short of gas tax proponent’s projections by $3.7 billion.
Family disposable income would be, on average, $2.5 billion less per year, in real terms. That’s equivalent to the cost of sending 532,600 students to college each year.”
It seems to me that we need to put in a little more research into the people we are electing into our government.  These guys obviously don’t know anything about economics and don’t seem to care about what their decisions will do.  All I can see is that all this will do is give them more of our money to line their pockets with so that they can waste it on unnecessary projects.  I think that if we keep their budgets smaller, then they will decide where the money would be best spent instead of throwing money at every idea that comes to mind.
This is what happened in Flint Michigan after GM moved their plants overseas along with the jobs.  The city dried up because there were no jobs.  The local government decided that it could do a better job and ended up spending billions of dollars on a museum, hotel, and other projects hoping to boost the economy, which backfired on them because they didn’t put any thought into the projects to see if they would actually receive enough revenue to keep the facilities open so that the jobs created would still be there today.


Dr. Tufte said...

Many comments.

1)Gasoline prices may be soaring (although they have been dropping since March), but in real terms they are low by historical standards.
2)Be very suspicious of any government official wanting to raise money for road and transportation projects. This is commonly known as the biggest source of pork barrel projects for members of Congress.
3)Surprisingly, there are a lot of conservatives who actually like the idea of a gasoline tax. This is because they oppose the income tax, and want to replace it with a tax on consumption (since taxing income taxes both consumption and saving). Since gasoline is such a big consumption item, they see a bigger gas tax as a backdoor way to move away from the income tax. See the Econlog post entitled "Gas Tax Debate".

Congress should be capitalized, paragraphs should be separated by a blank line (when there is no indentation), and there is no link to any of the stuff about Flint, Michigan.

Kid said...

From the blog it seems to me that a tax on gas would be more detrimental to the welfare of the American people then a benefit. A gas tax would decrease spending in other areas of the economy. For example I personally have not traveled as much this summer because of how high gas prices are already. I think many other people have restricted spending on vacations and traveling also. By less people going on vacations it hurts people financially who depend on tourists as a source of income. When less people go to vacationing spots it causes unemployment. Unemployment means less money is being put back in the economy. If congress was to pass a new law imposing a new tax on gas it could cause a recession.

Tom DC/VA said...

I wrote this yesterday but forgot to post it, so the fine Dr. has beaten me on a couple of points.

First, you cite a bunch of numbers from the Heritage Institute (which has a definite slant, so caveat lector) about the harm of increased taxation without any counter-cites about the economic benefits of the investments for which the taxes will be used. The Heritage quote is just talking about abstract taxation. There is a spending side to all revenue. There may be no benefit to the projects the Congress has in mind, or the benefits may be less than costs, but they might also be greater than than the costs. It's not like a publicly-funded infrastructure project has never been cost-effective; the Interstate Highway system comes to mind, as do water/sewer systems. However they are often vehicles for pork or corruption and thus should be subjected to a good cost/benefit analysis. That's what they train economists for, right?

Second, roads and transportation projects are substantially different from tourism projects such as museums and stadiums, which are rarely cost effective. Allowing increased/cheaper trade to a location is different from trying change what people spend their money on. Civic boosters always inflate the benefits and lowball the costs of their pet projects, so what happened in Flint is par for the course. Again, a good cost-benefit analysis of each specific project is needed. You are right to criticize the Flint debacle, but then apply your conclusion to something different.

Third, believing campaign speeches contain actual economic thought isn't very wise. Bush talks a lot about putting money in people's pockets, but he never talks about the IOUs (also known as T-Bills) that he's handing out like crazy. Funny how that is. Viewing the actions of the Bush administration through the lens some economic thinking (what are the benefits or costs of long-term deficit spending?) or economic history (has this country ever grown out of a structural deficit, or are tax increases inevitable?) might temper your enthusiasm a bit. You can be conservative and be an economist, but there will be tension between being a Republican and being an economist.

A good blog post you should read is this one from Tyler Cowen:


Also, white space helps readability.

kavindavis said...

High gas prices don't realy effect me personaly when it comes to traviling, becouse for me last winter it was 20 dollers to fill my car and now it is 28. So traviling somewere witch will take a tank of gas realy doesent make that 8 dollers realy that high. Its when I have to drive around town and fill my car up 2 times a week. Thats when I notice my monthly gas bill go from 80 dollers a month to 112 dollers. That I notice.

I was also reminded of what one of the managers at Parkway said to me after I read Dr. Tufte's blogg.
He is a big conservitist, and on Thursday we were talking about taxes and he said he hates that he has to pay taxes out of his pay check then when he buys something and has to pay taxes on that too. He fills that there should only be taxes on consumption not on income. I dont know how much of that I agree with becouse they would just raise the taxs on goods and the monery we would save would just go to buying what we would normaly buy.

Ned said...

Well, if the government can tax something, they will. I recently lived in England where they even have a tax for watching television. The first time I had to fill up a car, I swore I'd never complain about gas prices in America again. The cost was about 79 pence a liter, which ended up being(at the then current exchange rate) around $5.00 a gallon(most of which is tax). I agree with Dr. Tufte here, gas prices aren't that bad in America. I don't think another tax increase would make that big of a difference to the average person. I'm not saying I like extra taxes, or that it wont have an effect on the economy. People will get use to it as they've gotten use to everything else that has risen in price due to tax and inflation.

Senator Miller said...

I think that unless absolutely needed to make road improvements and maintain our current road system, an additional tax would decrease welfare. I just hope this isn't just another plot to take money our of those hands that earn it to "Big Brother" who would probably spend it in ways that wouldn't help tax payers near as much as tax payers spending it for themselves.

Boris said...

Although I don't look forward to a tax increase on gas, I do agree with the third point that Dr. Tufte presented. A tax on consumption rather than income helps people in general to save money, and distributes taxes more evenly among those that are using the services associated with the tax. Some people are conservative when it comes to driving and spending on gasoline. I think that they should be rewarded with an income tax cut for their efforts.

Another thought that crossed my mind is that higher gas prices may continue to fuel the flame under the automobile industry that is increasing research in fuel efficiency. Currently the Japanese auto makers are strides ahead of the U.S. in electric and hybrid automobile production.

C-Dizzle said...

I think it would be interesting to actually see where every dollar collected from the gas taxes goes. Maybe I’m one of the few and far between but has anyone ever seen a road under construction that has 5-6 government workers in their little orange vests just sitting around while a single guys is does the work?

I’ve seen it way to many times! Honestly, how many guys does it take to hold up a “Slow” sign while one guys digs in a backhoe and four or five other sit on the bed of a truck watching. I don’t want you to think that this is a one sided comment either because I worked in the construction business. I’ve seen the way some government workers are and the shortcuts they take to make a buck. It’s sad. (This isn’t just a problem with government workers either.)

So, my point is that if they can honestly prove to me that every gas tax dollar is being used to its fullest and there’s a need for more, I’ll be willing to pay the tax. If not, why doesn’t the government just fire a few hundred road construction workers and observe that the same amount of work is still being done!

kamm said...

I like what Dr. Tufte said about having a little more gas tax rather than more income tax. I feel very pessimistic when government officials want to raise taxes to spend more money on highways. It seems like that is usually one of their vague explanations to get more tax money without really having a good proposal for it. I think you were absolutely right when you said that by giving the government a little less tax money to work with, they will be more careful about what they use it for.

james said...

If an increase in taxes creates a decrease in spending does this help. My english teacher commented that while in Romania earlier this year that gas was six dollars per gallon. Many people in European countries walk, ride bicycles or use public transportation. Did the gas price rise with this increase or did this increase cause a rise in gas prices.

Dr. Tufte said...

Spelling problems in Kavindavis' comment.

Everybody go back and read the comment by Tom DC/VA which I thought was really good. Also, check out the URL he has at the bottom (it is not linked though, so you have to cut and paste).

I'm not sure how I feel about taxes on gasoline. It's already taxed a bunch, but on the other hand it has inelastic demand (so the tax will fall on consumers) and it is purchased more or less universally. So, it makes a good target.