Federal Gasoline Tax Increase
In the first year of his Presidency, Donald Trump presumably floated the idea of a federal fuel tax increase to pay for his infrastructure plan. While this infrastructure plan never gained traction and details of it were never made widely available, except for a public relations moment by Gary Cohn in early 2018, I must agree with Trump that the basic idea of a higher fuel tax is very sound. Now that the President has again called for a massive infrastructure plan, it is time to revisit the federal fuel tax situation.
I am originally from Belgium, and the principle of any consumption tax in Western Europe, be it on gasoline or Value Added Taxes (VAT) on goods and services, is widely accepted as it makes a lot of sense. Unlike payroll or real estate taxes, taxes on consumption can be, to a degree, controlled by the individual. VAT on clothes is too high? Buy less or cheaper clothes. Gasoline tax is too high? Carpool, use mass transit or, most importantly, buy a vehicle that consumes less or no gasoline.
Besides the fact that oil is a heavily polluting energy source, there is also only a finite amount of it. We should encourage less usage of gasoline by the general public in favor of the commercial users, who for the moment do not have the same alternatives.
Federal gasoline taxes are currently 18.4 cents per gallon, unchanged since 1993. At that time the average retail price of gasoline was $1.05 per gallon, meaning that the tax amounted to about 17.5% of the price. Instead of keeping this tax at a fix amount, why not maintain it at a fixed percentage of say 15%.
We are living in uncertain times, but one thing is clear: it will be expensive. The latest $2 trillion rescue package may only be a start. Chairman Powell says the Fed “will not run out of ammunition.” Almost ten million jobless claims over the past two weeks (the previous weekly record was 695,000). Goldman Sachs predicting a 34% annualized drop in GDP this quarter.
Extraordinary times call for extraordinary measures. The general public is in lockdown and not going on long drives. Commercial gasoline users like Walmart, Amazon, FedEx, and the like are seeing such a robust demand for their services that any increase can be easily absorbed. Only six months ago the average retail price for gasoline was nearly $2.60 per gallon, and that the average of 2019 was in excess of $2.50 per gallon.
In reality gasoline should never average below $2.50 per gallon. In Belgium the average price is $5.75 per gallon and the average price of gasoline around the entire world is $3.90 per gallon.
For the detractors who say that gasoline taxes are regressive, this will help pay directly for the $1,200 dollars to be sent to low income families, which at this time is more needed than cheap fuel. As a matter of fact, there should be a government commitment that, for the foreseeable future, all revenue from federal fuel tax will go directly to low income families, either through direct cash distribution or tax relief. Once economic activity returns to normal, the tax should be used for a combination of infrastructure spending and building a permanent safety net for low income families.
It takes courage to raise taxes at a time when the economy is screeching to a halt, and especially in an election year, however in this particular case the effect on individuals as well as on business will be manageable for both in the short to medium term, and beneficial in the long term.
Source: US Energy Information Administration (www.eia.gov)