Wednesday, May 14, 2008

Every day is already a gas tax holiday

The cost of gas has tripled in the last few years, Goldman Sachs is predicting oil at $200 a barrel, and the economist Paul Krugman makes the case for why this isn’t a speculative bubble. Given that reality, what’s a country to do?

Subsidize?

Both Hillary Clinton and John McCain’s recommendations for a gas tax holiday this summer begin us down this road. As it stands now, we are already experiencing a gas tax holiday, every day of the year. Our gas taxes have 42% less buying power today than when established in 1993, which is why our road infrastructure is in such sorry state of disrepair. Imagine trying to keep your own life in good working order with 42% less buying power.

And indeed, filling up the gas tank is taking a significant bite out of the average family’s household budget, and is forcing difficult choices among those with the lowest incomes.

Is subsidizing the answer? It might be, for some very small slice of Americans. Which doesn’t mean it should be for all Americans.

Indonesia gives us an example of what this path holds. That country has been subsidizing gas for its population for years, initially certainly with good intentions of helping ease the cost of a perceived necessity. This year, Indonesia anticipates that these subsidies – 40% of the real cost of fuel -- will eat up 13% of its federal budget, more than it spends on education and health care. When the government reduced these subsidies in 2005, riots ensued. Yet projections around gas prices are forcing the Indonesian government to sensibly reduce is subsidization a seond time. It is expected to announce another reduction in the subsidy shortly, resulting in an immediate 25-30% increase in gas prices.

I think we would all agree that an overnight 25% increase in fuel prices is going to be a real shock to their economy. But it is the right thing to do. Better yet is to never start down this path. It isn't helpful, not in the short run, nor in the long-run. More on that in the next post.

2 comments:

Paul Barter said...

Subsidies and a sense of entitlement are truly a plague in urban transport policy. Malaysia and Indonesia have both been struggling for years to reduce the fiscal pain from their fuel subsidies.

Indonesia's current approach is promising (but still not easy). They are giving direct payments to the poorest folks to compensate them for the knock-on effects, while also loudly pointing out that the rich "burn" most of the subsidy anyway.

For comments on an earlier round of subsidy reduction, see http://urbantransportasia.blogspot.com/2006/03/changing-petrol-price-politics-in.html

Jim Lerner said...

A thought about gas, cars, taxes, and "national security". We should tax all foreign oil [at a minimum] to the extent that the military are put in harm's way for energy/"national" security. We wouldn't be in the Middle East, except maybe around Israel, except for all that oil. We certainly wouldn't be in Afghanistan or Iraq. Send the bills for those wars (including the long term costs to wounded soldiers) to the petroleum consumers and they will be changing their ways very quickly. The cost of gas is heavily subsidized by our federal tax dollars, about 1/3 of which go to the military. If this sounds regressive, consider that you could reduce federal taxes by an equivalent amount, so that non-consumers didn't have to pay for those operations. Some rough numbers: we import over 10 million barrels of oil per day. The cost of the Iraq war (not including fixed Pentagon budgets or Afghanistan) is $341 million per day. The cost would be considerably higher if Pentagon costs were amortized over operations. So probably each barrel of crude ought to cost an additional $50 or so.

The subsidization of petroleum by the US is a horrible factor in the global warming predicament that we are now in. It is the opposite of reasonable, rational behavior.