US Petrol Tax

US Tax on petrol?

One of the (many) things I just don’t understand is the lack of any serious tax (or even discussion thereof) on petrol in the US, so I wrote the following with a view to sending it to the New York Times:

The Administration has among many other objectives an ambition of making America less dependent on (foreign) oil, reducing the budget, trade and current account deficits and saving some, if not all of the domestic auto manufacturing base in Detroit.

So it’s a bit sad to see and difficult to understand that the Obama Administration has abolished plans to increase tax on petrol at a time when it is uniquely positioned to do so!

For the first time the Administration has the car manufacturers on its side, or in its pocket, but chooses to update CAFE (minimum fuel standards for cars) with effect from 2016......What happened to not ‘kicking the can down the road’?

Detroit talks about building ‘small’ cars i.e. European sized cars, but there are some who question the public’s desire to buy smaller and thus more fuel efficient cars, but this is an attitude the government can influence:

Increase the tax on petrol!

There is nothing like the price of petrol that will make the consumer more interested in a smaller and more economical car .

In Europe petrol costs $6-7 a gallon and this has not stopped Europeans driving or having some of the worst traffic jams in the world (the M25 in the rush hour springs to mind), but it has made more people buy smaller more economical cars ever since the oil crises in the 70’s after which European governments started taxing fuel.

The effect of this is immediate as opposed to waiting for hybrid and fully electric cars to become fully mainstream and CAFE to come into effect.

Ford and GM already have the cars in their ranges and produce them - just not in the US. Of course this will hurt the owners of un-economical cars, but the economic down-turn has probably already taken its toll on residual car values.

A government subsidy to scrap older (gas guzzling) cars when a new, smaller car is purchased would help soften the blow and help stabilize sales of new cars. The ‘cash for clonkers’ scheme is about to be passed by Congress.

In Germany a similar scheme has helped boost car sales, which were actually up 18% y/y in Q1 during a period where the car industry is on its knees as sales are plummeting.

The added benefit is that even $1/gallon tax would bring in $390 million a day or $142 bill a year, if consumption does not fall.

There would be a direct reduction in the budget deficit, which is at record highs. If it were brought up to $2 and consumption fell by 30% the trade deficit would fall by $70 billion a year (at $70 per barrel) and the budget deficit would fall by $200 billion. All this can be introduced more or less immediately - I am not suggesting changing the tax by $1 or $2 overnight, but increasing it by 5-10c a month which will give the consumer/driver some time to adjust to the reality that petrol will be more expensive in the future.

It is not inconceivable that consumption would fall even further as cars doing 10-15 miles per gallon are replaced with cars doing 40-60 miles per gallon. This would reduce the demand for oil and thus, possibly, the price of oil, which would be beneficial to everyone, but the oil producing countries.

Ultimately it will give the government a way of reducing the impact (on the economy) of a dramatic rise in oil prices on the economy by reducing the tax if the price increase is deemed to be too steep, as experienced by last summer’s spike to $147 per barrel.

Obviously, this will not be a popular measure, but tax increases are never popular - I don’t remember Europeans being in favour of tax on petrol, but it happened and it has worked!

An old friend (who lives in the US), having read the first post on this blog told me that I wrote ‘without regard for the American psyche’ - he is probably right - because I listen to/watch a lot of CNBC and Bloomberg TV and this topic never comes up................!