Raise the gas tax

Yes, you heard that right

I am not a politician. I am not an economist either, though one day I hope to be. Of all my unpopular proposals, this one would never be favored by a politician. But it’s also a good idea.

Gas prices fell by an average of 80 cents a gallon over the past month, something to be celebrated by those occupying the White House. Expensive gas due to supply disruptions, like the OPEC embargo of the 1970s, are bad because they arbitrarily limit the productive capacity of the economy. But higher gas prices due to a gas tax are different.

Gas produces what are called “negative externalities.” These are negative consequences of consumption that are externalized onto society rather than the consumer. These include carbon emissions, local air pollution, and congestion of roads. As a driver, you don’t bear the cost of your own car increasing congestion, your contribution to global warming, and the air pollution created by your driving. In economics, a utility maximizing outcome involves taxing externalities such that the consumer “internalizes” these costs. This means taxing gas. Now there are already gas taxes in the US, with Pennsylvania charging the highest gas tax at 57 cents a gallon. According to an analysis at UC Davis, the optimal gas tax rate for California would be $1.37. This is more than three times the current gas tax in California. This would optimally internalize the external costs of driving, and increase total welfare, and would be a good idea for the US to adopt. As gas becomes taxed, people drive less, clearing roads and lowering pollution to a significant degree, while also being freely able to make necessary trips and price in their driving’s costs and benefits.

Now, what about people’s budgets? This is a valid concern. Many working class people’s financial positions have been hurt by expensive gas as of late. Wouldn’t the new taxes cause more harm? My answer: they don’t have to. The government can send out checks to each American equivalent to the per capita revenue from the tax. The median consumer of gas would be taxed and then paid by the government the same amount back. This solves two problems. It correctly curbs overall driving with the gas tax, but at the same time compensates people in the process. Those who drive a lot will lose out, those who can curb their driving will receive a windfall.

Of course, this is politically toxic. I am not suggesting Biden propose this to win the midterms (though I doubt his approval ratings can get any lower.) Raising the gas tax would increase overall welfare maximization for Americans. We live in a democracy, so this wish will probably have to wait.