Now is the perfect time to raise gas taxes

Congress needs to finance highway and transit projects but can’t agree on how. The traditional revenue source is the gas tax. Gas prices are at their lowest levels in years and dropping. Consumers would barely notice if they had to pay a bit more now at the pump. But a gas tax hike won't happen. 

Let’s see if I have this right: Congress needs to finance highway and transit projects but can’t agree on how. The traditional revenue source is the gasoline tax. Gas prices are at their lowest levels in years and dropping. Consumers would barely notice if they had to pay a bit more now at the pump. And it might eventually mean less time sitting in traffic.

So will Congress take a perfect opportunity to raise the gas tax and fund these projects? Probably not. But if it doesn’t, it will fumble one of those rare opportunities when the economic and policy stars align almost perfectly.

There is little doubt Congress needs to do something. A few Republicans would scrap the federal system entirely and turn infrastructure over to the states (though they’d still have to pay somehow). But most in Congress want the feds to finance those roads and bridges. They just don’t want to pay for them.

This has been going on for years. As a result, the Highway Trust Fund is, not to put too fine a point on it, broke.  In August, CBO estimated that between now and 2024 outlays will exceed revenues by $157 billion. Congress has not increased the gas tax since 1997. And, at the moment,  lawmakers are keeping the trust fund going by resorting to gimmicks such as cutting employer contributions to their worker’s pensions (don’t even ask, but if you must know, here’s how that one works).  Their temporary patch is due to last only until May.

When I stopped at my neighborhood gas station yesterday, I paid $2.94-a-gallon for regular, which happens to be almost exactly the national average. Prices have not been this low since 2010, just as the nation was starting to crawl out of the Great Recession.  Adjusted for inflation (using 1979 dollars), regular gas costs about 90 cents a gallon, roughly the same as in the mid-1980s.

As market prices fall, people will drive more and perhaps buy more SUVs. That will boost demand for gasoline and raise tax revenues, but not by enough to fill the trust fund’s pothole. While a modest tax hike might tamp down that new demand a bit, the combination of more consumption and higher taxes (perhaps an extra 10 cents a gallon) could fund those roads and transit projects.

For economists, one key question when figuring how consumers respond to tax hikes is whether those increases are visible (in econo-jargon, whether they are salient). Normally, if people notice sales or excise tax hikes, they will respond by buying less of whatever is being taxed.

There is lots of research about how consumers respond to higher taxes as opposed to higher market prices, and some suggests they react more strongly to tax hikes. But much of that work looks at tax increases in the context of flat or rising underlying prices rather than the falling gas prices we’re seeing today. Here’s one 2013 article by  Shanjun Li of Cornell, Joshua Linn of the environmental group Resources for the Future, and Erich Muehlegger  of Harvard’s Kennedy School.

If your goal is a big long-run reduction in consumption of fossil fuels (if, say, you are worried about climate change), modestly raising taxes in the midst of falling prices won’t get you there. A big tax hike might, but that’s impossible these days.

On the other hand, if you want to fund construction of roads and mass transit, a modest gas tax hike could be just the ticket. In theory, this could be one of those issues where the newly-elected Republican Congress and President Obama could find consensus. After all, nearly every pol loves to cut ribbons. Unfortunately, it is almost impossible to imagine GOP lawmakers making one of their first votes a gas tax increase.

Pity that while the economics and policy line up perfectly, the politics is, well, the politics.

 The post Now is the Perfect Time to Raise Gas Taxes appeared first on TaxVox.