Friday, May 17, 2013

Gradually-increasing gas tax that's buffered against price shocks

That's the answer. The question is what's better environmentally and economically than the current situation of an inadequate gas tax and a price that swings widely.

We need to increase the gas tax, a lot, to cover the economic externalities, decrease overconsumption, accelerate the transition away from internal combustion engines, and pay for infrastructure previously paid for by gas taxes on inefficient engines. At the same time, the public hates increasing gas prices and the more environmentally responsible leaders get beat up politically every time the price goes up, more than they recover politically when the price goes back down.

I think the public would prefer predictability and less variability even if the price goes up on a gradual basis. So here's my suggested deal:  set the federal and/or state gas taxes at the wholesale level and increase them at 5% annually (or whatever set level we can get, hopefully better than the usual inflation rate). That tax increase holds, if the wholesale price of gas doesn't change. If the wholesale price drops, the tax increase goes up even more so the year-on-year change is +5%. And if the wholesale price increases, the tax increases less or even decreases to get the same net increase.

This idea stabilizes the wholesale price, not retail which will vary with other costs, but overall it should dramatically reduce variability.

The downside is that the price doesn't react to temporary price signals so it's less efficient. On the other hand, an increasing tax captures more economic externalities, making the price more efficient compared to the present. I'd say the good outweighs the bad.

Second, the revenue stream is far more variable, but overall it will be better than present.

Just an idea