Introduction
On March 19, 2009 President Barack Obama issued guidance to car companies… in 2016 car companies will have to adhere to new restrictions on fleet miles per gallon. Specifically, cars will have to average 39 miles to the gallon, and trucks 30. The goal of the program is to reduce the United State’s dependence on foreign oil and reduce greenhouse gas emissions. Assuming those are reasonable goals, is this the best approach possible to achieve them? If it isn’t, is there another way to achieve the goals?
Myths
Contrary to popular opinion, most of the oil in the United States is not imported from the middle east. The top three suppliers to the United States are Canada, Mexico, and Saudi Arabia. These states can safely be classified as allies. A sizable amount of the oil used in the United States, 42%, is also produced here. Regardless, 58% of the oil used in the United States is imported, and perhaps reducing this dependence is a good thing… you be the judge.
CAFE
CAFE regulations, (or “Corporate Average Fuel Economy”) started in 1975 to set standards for the efficiency of vehicles under 8500 pounds gross vehicle weight. The standards have been changed numerous times over the last 34 years, culminating in the current standards of 27.5 miles per gallon for cars and 23.1 miles per gallon for trucks. CAFE sets a harmonic mean that car manufacturers have to meet in order to avoid fines. CAFE is based on the cars and trucks sold by manufacturers; this inherently links the average economy to customer demand. There is no corresponding penalty or incentive for consumers to purchase more efficient vehicles (with the notable exception of hybrid vehicle tax credits).
What About The Gas Tax?
The U.S. currently levies an 18.4 cent gas tax. Additionally, the states impose additional taxes on fuel, bringing the average to 45.6 cents per gallon. The gas tax is an established program that the government could use to spur demand for small, efficient cars which get better mileage.
The current system of forcing car companies to make cars that don’t have the demand to sell is unsustainable. Large cars, while more inefficient, are safer and more comfortable for the average American driver. European tastes for smaller cars don’t translate well to the American market. In Europe, higher gas prices first drove the market for diesel vehicles, followed by a ‘race to the bottom’ for smaller cars. Only in Europe could the Mini Cooper and Smart ForTwo have been designed…
However, the gas tax is a mechanism the government could use to increase demand for more efficient vehicles. Over time, a higher gas tax will lead consumers to choose more efficient cars and to buy the cars the car manufacturers are forced to make. Only some sort of incentive (or disincentive) will cause consumers to choose the CAFE mandated vehicles. Simply supplying vehicles without demand will leave a lot of vehicles unsold.
You Can’t Be Serious…
Yes, I’m serious. Gas prices, driving behavior, and vehicle purchasing decisions are inexorably connected. Increases in gas prices lead to less driving and eventually. Last summer, $4.00 was a major talking point. For the first time in years the number of miles driven in the US actually decreased. Efficient vehicles like the Toyota Prius sold off of dealer lots. Now that gas is back under $3, (but rising quickly…) there is a large dealer backlog of efficient cars. How quickly consumers forget…
A Modest Proposal
Many people, some of them in curious positions, have come out in favor of the gas tax. Holman Jenkins of the Wall Street Journal commented on this very issue, quoting Bill Lutz heavily. Mike Jackson, the CEO of AutoNation, has been very vocal on this issue… see Carol Loomis’s article.
If congress is (as) serious (as me) about making CAFE a sustainable program, putting a floor under the price of gasoline is the best way they can do something about doing that. CAFE is a joke… a program that merely picks on the politically weak car industry as a victim instead of imposing new taxes on a possibly reluctant population. However, this is not an “If you build it, they will come” situation. There are taxes on alcohol and cigarettes, with many studies showing that consumption of them decreases when taxes increase. If gas usage is to decrease, it only makes sense to raise its price until that happens.
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The only problem with this issue is that it will take a politician with the power to get it done and the lack of ego to commit career suicide. Any idea of raising the gas tax where I live (Massachusetts) is always met with rage and a borderline uprising. People are short-sighted and can only remember the state screwing them out of billions during the big dig, which we’re STILL paying for. This is the right thing to do, but may be politically impossible.
Completely agree. Political cover would be needed to accomplish this sort of a goal. Perhaps a tax reduction in another area (income?) could be used as political cover to enact this sort of a change.
The other issue, politically, is gas taxes are seen as mildly regressive. Since people on the lower end of the scale spend more of their salary on gas and transportation, gas price increases are said to hit those with lower incomes harder. Again, an income tax reduction could be used strategically to dampen those criticisms.
One issue: Saudi Arabia can be “safely classified” as an ally? Please double-check where the 9/11 hi-jackers, not to mention Bin Laden himself, came from. Regardless of what the Crown Prince thinks of us, (his best customers) the people of SA hate us.
It’s important to draw a distinction between the actions of citizens of a country and the government of a country. I would argue that Saudi Arabia is even an important ally in the fight against terror now that weaknesses in their surveillance have been exposed.
For your second point, reference the country of France. Say what you want about France and their citizens, (they generally aren’t the biggest USA fans) but I would also consider them an ally.
Agree with what you’re saying. But comparing three hundred years of history with France in regard to our Saudi alliance is fool-hardy. Our relationship with SA is based on oil. We need their oil. They need our money. This is like comparing a life-long relationship with a good friend with someone you just started having casual sex. Once the orgasms dry up…there isn’t much there to stay afloat. I think my basic problem is with your word “safely”. And not just because I hate adverbs…
If I said, “Saudi Arabia is our tactical ally who we are only using for their oil”, would everything be settled?
If we asked our President, straight up, “Is Saudi Arabia our ally?”, he would undoubtedly say, “yes”. Still, I can see your point. The imposition of the gas tax (again, *ASSUMING* all of the things I wrote in the above article!) still makes sense regardless of which word I use to describe Saudi Arabia, agreed?
One of the keys, however, is determining how much the gas tax actually curbs consumption. Saying that raising the gas tax decreases gas usage is not enough. Certainly, if a 1% increase in taxes causes a 10% decrease in gas usage, then it is good. But if a 50% increase in taxes corresponds to a 0.2% decrease, would it then be good? I am not sure that anybody can exactly give the answer, but what is clear is that the extent of the dissuaded consumption is very important to the discussion.
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[...] take a real world example. A previous article by colleague Paul Kamp argued for higher gas taxes. Gas prices are an inelastic good. Consumption [...]