My daughter asked me the other day why the birds couldn’t breathe. It took me awhile to figure out that she was talking about what’s going on in the Gulf.

We’re going on day 46 of the BP spill. So far, BP has tried robots, drilling a relief well, a contaminant dome, “Top Hat”, “Top Kill”, a riser insertion tube, the “Junk Shot” and two versions of “Cut and Cap.” None of the efforts have worked and oil continues to gush into the ocean at an estimated rate of 504,000 gallons per day (estimates actually range from 210,000 gallons per day to BP’s concession that it could be as high as 2.5 million gallons per day). PBS has prepared an interactive ticker so that you can see the magnitude of the estimates:

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The Obama administration has already sent a $69 million bill to BP for the government’s costs to handle this whole thing. It’s said to represent about 75% of the total bill so far. BP claims that their costs to date are nearly $1 billion – and their stock shares are plummeting.

It’s not a pretty picture all the way round.

When President Obama addressed the matter this week, he reiterated his desire for more clean energy options and less dependency on oil. He would not, however, rule out more offshore drilling. He emphasized that domestic oil production is important, one of a handful of political notes that he shares with Sarah Palin.

So yeah… massive oil spill, increased clean-up costs, regulations… As I hear these sound bites focusing on increased domestic oil production with more oversight from the government, I’m nervous. I do think that oil companies have been allowed too much leeway to make decisions that impact our taxpayers without any consequences. But increased oversight in political speak really means more costs. And the government just doesn’t have any money right now. Taxing the oil companies won’t help – the tax will just be passed along to consumers with perhaps a little mark-up for their pockets for good measure (a la the cigarette companies when the cigarette tax increased). Plus it will tick off the oil company lobbyists and we just can’t have that.

So where does that leave us? And then it hit me. For at least two years now, many in Washington have been clamoring for an increase in the federal gas tax. The federal gas tax hasn’t moved from its 18.4 cents per gallon mark in nearly twenty years. I can’t help but wonder if much of the posturing about costs right now isn’t another way of asking: is it time to raise the federal gas tax?

The federal gas tax was a pretty significant issue during the race to the presidency but efforts to both increase – and decrease – the tax went nowhere because it’s political dynamite. Folks don’t take kindly to tax increases without some compelling reason. A war thousands of miles away wasn’t enough. But an oil spill on our own shores? During peak beach season? That just might do it.

Before you fire off your nasty emails, I’m actually not making light of the oil spill. I’m being critical of the politics surrounding it. I simply fear the consequences of a rush to “fix” an imperfect system.

For the record, I’m not altogether opposed to a bump in the gas tax. In my opinion, it should at least keep pace with inflation (if it had, it would be 27 cents per gallon now) since the purpose of the tax is to maintain infrastructure – and the cost of supplies and labor sure go up. I’m just worried about the timing. When you make tax policy reactionary, it often comes across to taxpayers as ridiculous and irrational. This, for example, could become the “blame BP tax” instead of a thoughtful increase to support rising costs.

I will admit, however, that sometimes it takes *something big* to make taxpayers accept what is otherwise distasteful.

So, what do you think? Is now the time to raise the federal gas tax?

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Author

Kelly Erb is a tax attorney and tax writer.

Comments

  1. The only positive thing I can see coming out of the BP fiasco is that should another spill like this occur, we will be better prepared to know how to handle it…
    But in reference to your question…if you can absolutely guarantee the tax is going directly to support our infrastructure and the maintenance thereof, then it may be time to increase the federal gas tax. But not without solid guarantees…

  2. garagefather Reply

    IT would be difficult to believe that more regulation is the answer. Just like in the Wall St. fiasco of recent years, politicians scream we need more regulation and that we have deregulated too much. The fact is that there have never been so many regulations in so many industries in the country’s history and more regulation will just add to the disappointment when things go wrong. Several whistle-blowers blew the whistle on the sub prime mortgage industry and the government backed freddie and fannie, and nothing was done. In fact, politicians railed against the whistle-blowers as trying to ruin a good system. What good is more regulation going to do, at the cost of higher gas prices, if the regulators ignore the most serious problems or their bosses ignore the regulators? The government is too big and impossible to control now, why not make it bigger, right?

  3. I believe that if the gas tax kept up with inflation, and had done so gradually, it would have been the best way to ensure an acceptance of the increased tax. People would have accepted it (without finger-pointing) as an inevitable consequence of inflation, and it would have been so gradual that most people would not even be aware of it.

    Unfortunately, we are now stuck in a situation where any increase in the federal gas tax would be reactionary. But needless to say, a slight increase would be incredibly helpful. I do not think we even need to head up to the 27cent/gallon mark with this tax. An increase of just a few cents per gallon could help provide the means necessary for maintenance and improvement of infrastructures, and hopefully prevent any future repeats of the BP tragedy.

    The U.S. consumes 378 million gallons of gasoline each day (http://www.eia.doe.gov/basics/quickoil.html); raising the gas tax now even just a few cents really would not affect any individual’s life or financial situation. But spread out among the near 400 million gallons, it could make a positive difference in how infrastructure maintenance is conducted.

    (And as for dealing with the PR of raising taxes: most people will finger-point at BP. So if the govt ever plans to raise the fed gas tax, it would be almost foolish to not do it now, since most of the negativity would be funneled towards BP and away from them. And how rare of an opportunity is that?!)

  4. The gas tax originally was supposed to be earmarked for maintenance (and growth) of the transportation infrastructure, but in the last decade or so it’s been lumped in with “general revenue”, at least at the Federal level.

    The infrastructure is in terrible shape and needs massive infusion of money and construction just to maintain the status quo. (What’s the number — 3,000 substandard bridges in the Federal highway system?) So, first of all, the gas tax money should be earmarked, or at least genuinely reserved, for the transportation infrastructure. If that really happens, then there should be an increase in the tax as well. Even if the tax is doubled, it would be equivalent to a 7% price increase at today’s average per-gallon price for regular (less for midgrade and premium). The vagaries of the market can account for more than that over a very short time. It wouldn’t be all that painful, and the tax increase can be phased in by, say, a 3-cent increase every 6 months for 3 years. At that rate it would be almost unnoticeable.

    As for garagefather’s comment, I would think that today we have less regulation than we used to — less government “involvement”. The past three decades have seen a vast “return to the free market” so far as Federal regulation is concerned, often with highly undesirable consequences (such as the current recession).

  5. A question for Robert:

    Why would infrastructure and maintenance thereof necessarily be the most efficient use of new tax revenue (regardless of its source)? I don’t honestly see the economic or societal benefit to linking the source of the revenue to the use of the revenue.

    (In case this question comes across sarcastically or antagonistically, I promise, I don’t mean it that way. I’m just curious about your reasoning.)

  6. Mike: The main selling point of any tax increase is to sell the idea of what it is used for, correct? Unless I am mistaken, the govt has consistently shown a pattern of selling voters on ideas that would raise taxes by indicating they would only be used for a specific purpose, only to have that purpose be convoluted or disregarded later as the funds eventually get assimilated into the collective. (Borrowing from Peter to pay Paul so to speak…not to mention borrowing from Gene Roddenberry’s vernacular)

    It makes sense that if the cost of materials and labor has risen over the years to maintain our infrastructure, then logically the amount we pay should likely have increased with it accordingly.

    The societal and economic benefit? In California, our roads and highways are in serious need of repair, and expansion to accommodate the exponential growth has been lackluster at best. On a societal level, general safety would be affected, and hopefully, should expansion in areas that need it get close to keeping up with the rate of growth, sanity as well…Economically, we save over the long haul with more efficient traffic…costs to commute, costs to deliver goods and services all decrease if traffic runs smoother.

    Lastly, in the case of a gas tax, people who drive use the infrastructure; people who drive more use it more. As a result, the people who drive more pay more of a tax that helps maintain the govt structure they use. Isn’t that the most efficient and fundamental use of a tax?

  7. Thank you for taking the time to reply, Robert.

    “The main selling point of any tax increase is to sell the idea of what it is used for, correct?”

    I guess I would answer, “not in this case.” My understanding of the gas tax is that it’s supposed to be a pigouvian tax.

  8. Mike: you are right that it originated in this manner, then I believe in the 50’s, it first became a vehicle (pardon the pun) to support the transportation infrastructure as well. And thereafter, it flip-flopped back and forth.

    I think in the current volatile political mine field of today, “tax” has become a four letter word, unless accompanied with the word “less” Therefore, I think any increase in the federal gas tax would have a better chance of success if sold as a means to maintain and possibly advance the transportation infrastructure in existence today.

    Oh and on a side note, “efficient use” is subjective of course, and even more so when dealing with the government …

  9. “Any increase in the federal gas tax would have a better chance of success if sold as a means to maintain and possibly advance the transportation infrastructure in existence today.”

    No argument there–nor with your point that everybody has their own idea of what the most efficient use of resources is.

    Thanks again for taking the time to respond.

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