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Fueling America
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My big fat American gas tax

  • Story Highlights
  • A large gas tax would crimp demand, lowering wholesale prices, some argue.
  • Europeans pay gas taxes of $1 or $2 a gallon
  • U.S. tax is about 18 cents a gallon; state taxes are generally under 40 cents
  • Next Article in U.S. »
By Steve Hargreaves
CNNMoney.com
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Editor's note: This story first appeared on CNNMoney.com in May 2007.

NEW YORK (CNNMoney.com) -- It seems completely counterintuitive: Raise the gasoline tax to help American commuters.

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Would higher gas taxes mean a transfer of funds from Big Oil to the government -- and back to the public?

Motorists are already paying well over $3 a gallon, and there are signs that it's beginning to cut into demand and hurt consumer spending.

But if a big gas tax was levied -- like the $1 or $2 tax Europeans have to keep prices permanently over $3 or $4 a gallon -- how could that possibly help American consumers?

One argument says a tax would crimp demand, lowering wholesale prices.

"Anybody with any brains has advocated that, but not the politicians," said Fadel Gheit, an energy analyst at the financial services company Oppenheimer.

Lower wholesale prices, which would mean less profits for oil firms, combined with a higher tax could transfer money from Big Oil to the government, which could then use the cash for public programs.

Consumers would have to pay the same amount -- or even more than now -- but at least that extra cash could be returned to them in some way.

It might be used as a tax credit to offset the sting for those with a lower income, countering one of the most common arguments against such a tax. It could also go towards improvements in mass transit, expanded student loans or lower health insurance premiums.

Lower gasoline consumption would also reduce greenhouse gas emissions, a growing concern in the face of global warming.

"We still don't pay very much in gas taxes," said Lee Schipper, research director at Embarq, the World Resources Institute's Center for Sustainable Transport.

While wholesale prices for gasoline are generally the same in Europe as they are in the U.S., Schipper noted the $5, $6 or $7 a gallon Europeans pay, thanks to the high tax.

Americans, by contrast, pay a federal tax of about 18 cents a gallon. State taxes vary but are generally lower than 40 cents a gallon.

"As long as the marginal cost of driving is so low, the big changes aren't going to happen," said Schipper, who supports both a larger U.S. gas tax and more fuel-efficient vehicles.

By big changes, he means driving attitudes that more closely resemble Europe's, where he said there are 30 percent fewer cars per person, 30 percent fewer miles traveled per car and cars that use 30 percent less fuel.

Now sure, it may be easier for the Europeans to do this. The continent is more densely populated, and development has historically been more clustered in towns. Public transport is undeniably better. But whether this is a result of their high taxes is debatable.

Schipper said the European gas taxes were instituted in the 1920s, primarily as a luxury tax on automobiles, which were then mostly toys for the rich.

The relatively vast network of rail lines were already laid, and gasoline tax revenue was directed to general state coffers. Even today, gas taxes go to the state's general budget and are not specifically marked for mass transit or other environmental projects.

Still, he believes the high taxes have encouraged people to live closer to city centers and to buy cars that get better mileage.

"If gasoline was always expensive, you have to conclude that some of that had an impact," he said. "What Europe realized is they could steer consumption, not just raise money."

Others aren't so convinced.

Denny Ellerman, a professor at Massachusetts Institute of Technology's Sloan School of Management, also noted that the rail lines were already built before the gas tax. He also pointed to the terrible auto congestion in cities like London and Paris, and that Europeans don't appear to be deterred from heading out to the suburbs, which require a longer commute.

Ellerman said urban sprawl, while not matching the extent of the U.S., is increasing. He said it has yet to reach American levels -- not because of higher fuel prices but due mainly to higher land prices and lower income.

As far as instituting a bigger gas tax in this country goes, he wasn't for it.

He said most everyone has to use gas, and taxing it would hit the poor the hardest.

Ellerman also thought there were too many other variables for a gas tax to result in lower wholesale prices. Supplier nations like OPEC could simply cut production, or other nations could take advantage of falling demand and prices in the U.S. to use more themselves.

So could a gas tax result in lower wholesale prices and the resulting transfer in money to the government from oil companies? "That's absolutely fantastic thinking," he said. E-mail to a friend E-mail to a friend

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