Roe in Financial Times: How to make a petrol tax politically viable

In a follow up to their May 21, 2009, Financial Times’ op-ed, Harvard Law School Professor Mark Roe ’75 and New York University School of Law Professor Michael Levine discuss how to make a petrol tax politically viable. Their op-ed appeared in the July 7, 2009 edition of the Financial Times.

Professor Mark J. Roe '75

Professor Mark J. Roe ’75

Last month, a major climate change bill began winding through Congress. Meanwhile, carmakers, environmental regulators and the Obama administration announced with great fanfare a plan to raise the fuel efficiency of new vehicles – and energy secretary Steven Chu announced that a petrol tax was “not on the table” politically.

Yet almost everyone who has studied the subject – including Mr Chu before his latest job – agrees that a petrol tax would be much superior to directives such as those announced last month. It is hard for the government to choose the right fuel efficiency targets; and when consumers see fuel is cheap it encourages them to drive big, fuel-hungry cars and to drive them further. A petrol tax would help consumers to make choices that face the environmental facts, instead of having the government nag them to do the right thing.

If a petrol tax is as good an idea as the consensus takes it to be, why is it so politically dangerous that US politicians will not touch it? Four political forces combine to kill off significant petrol taxes.

The average consumer hates it. It is too painful to see those numbers on the pump every time you fill up. Politicians fear that if they were seen to raise petrol prices by a tax of a dollar or two, voters would not forgive them.

The second big strike against a tax is that heavy users of petrol, including people who live in the west, have powerful lobbying groups or senators who would derail it in Congress. The auto industry makes more money selling gas guzzlers than small cars – so count on senators from car-producing states to oppose a tax. The energy industry makes its money by selling energy – so senators from energy-producing states would oppose it too. Strikes three and four.

But wait – if a petrol tax would really make us better off as a nation, there ought to be a way to get there.

Facts and politics are changing. It may now be possible to get three of the four groups to support a petrol tax – or at least not oppose it vigorously. A window of opportunity is opening. We do not know how long it will stay open and the Obama administration ought to take advantage of it now.

Consider first a textbook move to get the public to accept a costly change in policy: give voters their money back through another channel. If they got a tax credit or refund for the amount of the average voter’s petrol usage, they would see that they were no worse off. They could keep the money and drive less or buy a more economical car.

Here is how it would work: Suppose you are the average driver, driving 12,000 miles a year in a 15 miles-per-gallon car. A $2 per gallon tax would cost you $1,600 a year. You would be unhappy about that. Sure, you would drive less if taxed and next time you would buy a car with better petrol mileage. But you would be so annoyed at the tax that you would not forgive your congressman for voting for it. But if you got a $1,600 cheque or a visible rebate on your taxes, you would understand that you were even: you might even think that with a little life adjustment, you could beat the game and come out ahead.

Your rebate would not change if you used less petrol. So you would have an incentive to keep some of that $1,600 by driving a little less often in a more fuel-efficient car. The country would import that much less oil, produce less carbon dioxide and get that much more freedom to manoeuvre in the international arena.

Heavy users would still have the motive and means to kill the bill in Congress. Taxi drivers and truckers, for example, use more fuel than average, so they would still strongly oppose a heavy tax. Suppose that each is powerful enough to kill the bill alone and that, if they acted together, no rational member of Congress would even propose a petrol tax.

They can be bought: the rebate concept could be extended to each identifiable, definable veto group. Let us say that taxi drivers drive 50,000 miles per year in 15 mpg cars. A little arithmetic has a $2 per gallon tax costing them $6,667; for truckers it works out at $32,500. That would be their rebate. Taxi drivers would have an incentive to use less petrol, for example by using hybrid cars. The California Air Resources Board has estimated that truckers could burn 7 per cent less fuel just by installing aerodynamic fairings. Payback would be quick. Politicians might even grease the wheels a little by giving them a bit more.

Auto manufacturers would be faced with customers who wanted more economical cars and could make money selling to them. They would also be faced with a government that now has power to help them re-adjust their thinking.

Energy companies might be a problem, but they would be outnumbered. Done properly, with some inspired political salesmanship, the average citizen, as well as heavy users of petrol, could all be at the forefront of supporting the petrol tax in Congressional testimony.

Yes, it would require some deft packaging to make it work. People would have to be helped to understand how the changes could work for them. But this president has a gift for explanation and we have a White House with Larry Summers and Rahm Emanuel. They should be able to make a plan and sell it convincingly to the public and Congress.

Michael Levine is a law professor at New York University School of Law. Mark Roe is a law professor at Harvard Law School