The Gas Tax. Overview. History of the Car. History of the Car. Facts About Transportation. Facts About Transportation

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1 Overview The Gas Tax Impacts and Alternatives By: Christine Royce, Dan Leatham, Nune Khachaturyan, and Ryan Champlin Background of the first fuel run car Energy Tax Policy: How tax was implemented on oil History of Gas Tax U.S. Dependence on Foreign Oil Effects of Oil in other Countries Energy Efficiency What we can do to conserve energy History of the Car History of the Car 1880 s: The first fuel run vehicle was built in Germany by Carl Benz that developed a car with four-stroke gas engine. Early 1900s: Cadillac and Ford 1908: General Motors 1925: Chrysler Year U.S. Car Registrations 8,000 23,000,000 20,700,000 (Depression) 30,000,000 25,600,000 (WWII) 40,000, ,000,000+ Facts About Transportation Americans drove about 2.9 trillion miles in 2003 Today, U.S. has more registered vehicles than licensed drivers. How does this effect gasoline tax and gasoline prices? Facts About Transportation In the U.S., transportation accounts for 2/3 of all our oil use. U.S. uses 300 gallons of gasoline per person per year one in every 20 consumer dollars was spent on gasoline and there was one in 30 in

2 Power of Car Industries Pressure on Industry Better fuel efficiency vehicles Hybrid or smaller fuel efficient cars Consumer demand Bigger Vehicles Make sense The U.S. is automobile dependant Energy Tax Policy Involves the use of the government s main fiscal instruments taxes and tax subsidies to alter the allocation or configuration of energy resources. Intended to either correct a problem or distortion in the energy markets or to achieve some social, economic, environmental, or fiscal objective. Energy Tax Policy Federal energy tax policy was focused on increasing domestic oil and gas reserves and production. Two oil/gas tax code preferences: Expensing of intangible drilling costs (IDCs) and dry hole costs The percentage depletion allowance Energy Tax Policy Subsidies for producers Write off s for bringing a well into production Claim 27.5% of revenue as a deduction Reduction in marginal tax rates in oil and gas industries. Led to more profitable production Lower prices encouraged petroleum consumption Energy Tax Policy 1970s An increased awareness of environmental pollution caused large revenue losses. Subsidies and depletion were hard to justify. Two Energy Crises Oil Embargo of 1973 Iranian Revolution Shift from oil and gas supply toward energy conservation. 2

3 Energy Tax Policy Energy Tax Act of 1978 Gas Guzzler excise tax Numerous tax incentives or subsides for energy conservation. Windfall Profit Tax 1980 Comprehensive Environmental Response, Compensation, and Liability Act of 1980 Energy Tax Policy 1980s Reagan Administration Free Market High gas prices would encourage alternative energy resources National Energy Policy Plan culminated in a 1984 Treasury study on general tax reform Tax Reform Act Incentives for oil an gas were pared back. Energy Tax Policy 1990-Recent Revenue Provisions of the Omnibus Reconciliation Act of 1990 Low crude oil prices were introduced th Congress focusing on tax bills and rising crude oil prices proposal to reduce or eliminate the tax on gasoline due to higher oil prices. Energy Tax Policy th Congress moved to rescind oil and gas incentives and even to raise energy taxes on oil and gas, in response to the high energy prices and record oil and gas industry profits. Reconciliation Bill 2020: Raised taxes on major U.S. integrated oil companies. 2006: Negligible tax increase on major integrated oil companies amortized over five years. History of the Gas Tax Congress first enacted an excise tax on gasoline, until 1956 the proceeds of the gas tax went into general revenues, although the amount raised each year was used as an informal benchmark for Federal highway spending. The Federal-Aid Highway Act of 1956 established the Highway Trust Fund and stipulated that 100% of the gas tax be deposited into the fund. From 1956 to 1982, the Highway Trust Fund was used solely to finance expenditures from the federal highway program. History Continued Highway Trust Fund revenues were first allocated to mass transit in the Surface Transportation Act of 1982, when Congress raised the gas tax from four cents per gallon to nine cents per gallon and dedicated one cent, or 20 percent, of the increase to the newly-established Mass Transit Account. Each time there has been an increase in the amount of gas tax going into the Highway Trust Fund 1990, 1993 and percent of the increase has been allocated to the Transit Account and 80 percent to the Highway Account. Of the current gasoline tax of 18.3 cents per gallon, 2.86 cents per gallon is allocated to the Mass Transit Account. (Through 1997) 3

4 Percent Distribution of Gasoline Tax Revenues Since 1983 Percent Distribution of Highway Trust Fund Revenues Since 1983 Date Before 1983 Apr. 1, 1983 Dec 1, 1990 Oct. 1, 1993 Oct. 1, 1995 Jan. 1, 1996 Oct. 1,1997 Percent Distribution General Revenues 17.7% 37.0% 23.4% 23.5% Highways 100.0% 88.9% 70.1% 54.3% 65.2% 65.6% 83.9% Mass Transit Account 11.1% 10.6% 8.2% 10.9% 10.9% 15.5% Other Trust Funds 0.7% 0.5% 0.5% 0.5% Date Before 1983 Apr. 1, 1983 Dec 1, 1990 Oct. 1, 1995 Jan. 1, 1996 Oct. 1, 1997 Percent Distribution Highways 100.0% 88.9% 86.2% 85.1% 85.7% 83.9% Mass Transit Account 11.1% 12.9% 14.2% 14.3% 15.5% Other Trust Funds 0.9% 0.7% 0.5% Current Gasoline Gas Taxes Nationwide The nation wide average tax on gasoline is 46.9 cents per gallon as of July 2007, up 1.1 cents from March The federal tax on gasoline is 18.4 cents per gallon. The average state gasoline excise tax remained consistent at 18.2 cents per gallon. Other taxes add 10.2 cents per gallon to the average tax on gasoline. These other taxes include applicable sales taxes, gross receipt taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees. Adding these taxes and fees to the state excise taxes results in a volumeweighted average state tax of 28.5 cents per gallon. Current Gas Taxes Excise: an internal tax or duty on certain commodities, as liquor or tobacco, levied on their manufacture, sale, or consumption within the country. Source. dictionary.com Current Gas Taxes Regionally Regionally, motorists in Western states pay the most in gasoline taxes, an average of 56.6 cents per gallon. State excise taxes in this region increased 0.2 cents per gallon from the march report, while other taxes increased 2.5 cents per gallon, to and average of Together with the federal tax of 18.4 cents per gallon brings the total to 56.6 cents per gallon. Motorists in the Mid Atlantic saw a decrease during this reporting period with other state taxes decreasing 0.4 cents per gallon to 16.9 compared to 17.3 in the March report. Motorists in the South consistently pay the least amount of taxes, an average of 38.4 cents per gallon with 19.3 cents per gallon in excise taxes, 0.7 cents per gallon in other taxes and 18.4 cents per gallon in federal taxes. Taxes from around the U.S. U.S. avg California Idaho New Jersey Connecticut Utah Wyoming New York So. Dakota Alaska

5 Reasons for Recent Tax Hikes Iraq War Katrina Inflation Increase in Crude Oil Prices Thanksgiving / Vacations Dependence on Foreign Oil 35% of U.S. consumption is domestically produced. 50% of crude oil is imported from other countries. Consume 20.7 million barrels of oil per day Saudi Arabia 0.31% of U.S. GDP U.S. provides 11.4% of Saudi s GDP Persian Gulf provides 11.1% Canada and Mexico provide 18.5% of U.S. consumption. 5

6 Dependence on Foreign Oil The world oil market is a single market, and oil sells at a single world rate. Price is determined by worldwide oil supply and demand. Any supply disruption anywhere in the world, has the same effect everywhere. Dependence on Foreign Oil Arab Oil Embargo 1973 Alternative resources increased imports Short-term shortages in supply which raised prices for a time Emergency Petroleum Act of 1973 Crude oil refinement grew from 13.7 mb/d to 18.6 mb/d in 1981 which lowered prices. Iranian Revolution Drop of 3.9 mb/d Price jumped from $14/b in 1979 to $35/b in 1981 U.S demand fell from 18.8 in 1978 to 15.2 mb/d in 1983, the lowest level since 1971 Dependence on Foreign Oil U.S accounts for a quarter of total crude oil consumption; if it drastically cut its consumption, the world price would also fall significantly, reducing production. Power of the Oil Industries 1960 Organization of the Petroleum Exporting Countries (OPEC); Iran, Iraq, Saudi Arabia, and Venezuela. Objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers, an efficient, economic and regular supply or petroleum to consuming nations; and a fair return on capital to those investing in the industry. Power of Oil Industries OPEC 1970s: Member countries acquired a major say in the crude oil price 1980s: Price peaked and then began to decline; joint action among producers to decide if market stability with reasonable prices was to be achieved in the future. 1990s: Hostilities in the Middle East and a rise in prices caused a panic stricken market and ongoing international climate change negotiations threatened heavy decreased in future oil demand. International Comparison Fuel tax exists in most countries, but there is great variation in the rate, even in the same region such as Western Europe or south America The consumption of fuel is inelastic, meaning that demand continues to be stable, even as the price of oil increases. So, governments take advantage of the tax as a source of revenue. 6

7 Somewhere in Europe Each country imposes a different fuel tax, so people will drive across the border to purchase cheaper gas. In Luxembourg, gas is 20% cheaper than in Belgium, a bordering country. There are many gasoline stations located on the Luxembourg side of the border to accommodate this demand. For smaller European countries & territories (Luxembourg, Gibraltar, Andorra), the lower tax revenue from their cheap fuel is balanced out by the amount of people that come into their country to fill-up! Singapore Extreme?? The fuel tax in Singapore is higher than in neighboring Malaysia Customs officials check the fuel tanks of each car leaving Singapore into Malaysia to ensure that the tank is at least 75% full so they have enough gas to get them back into Singapore. This action was taken to prevent a huge loss of revenue for the government of Singapore. Singapore Extreme?? Does this impinge on people s right to purchase fuel for their own vehicle? Would this work in the United States? South America Argentina has cheaper fuel than neighboring country Brazil Recently, gas stations in Argentina (near the border with Brazil), began to list two different prices for gas- one for cars with Argentinean license plates and one for all other foreign license plates. By preventing Brazilians from coming into Argentina to purchase gasoline, the government put a stop to long lines and rising oil prices. Canada In Canada, the fuel tax varies across the various provinces On average, 1/3 of the price of gasoline at the pump is a tax! In some provinces, and excise tax on fuel is collected by the federal government, the provincial government, and the municipal government. To top things off, some provincial governments collect a general sales tax on top of the excise tax! Canada, continued 7

8 Canada As a result, the Canadian government generates about $ 5 billion per year in excise tax on gasoline, diesel, and aviation fuel; also collects about $ 1.6 billion per year from the general sales tax on gasoline and diesel; provincial governments collect $ 8 billion Canadian dollars per year from the excise tax on gasoline and diesel. The money collected by provincial governments goes toward fixing roads and gets funneled into the budget of municipal governments Many Canadians cross into the U.S. to fill-up because it costs a lot less An International look Gas prices too high? Try Europe. August 26, 2005 a gallon of gas in Amsterdam now costs $7.13, compared with just $2.61 in America. The contrast in prices and environmental policies - and the dramatically different behaviors they inspire - signals a widening transatlantic energy gap. And it raises the question: Does Europe offer America a glimpse of its future? Source: Christian Science Monitor, online edition What s in store for the future?! Gas Tax vs. CAFE Corporate Average Fuel Economy (CAFE) Tightening standards as an alternative to increasing the gas tax Current focus of policymakers Actually encourages more driving Reduces cost of gas per mile driven, allowing people to drive more to reach a similar cost Gas Tax not only encourages the desire for more fuel-efficient vehicles, but it also reduces miles driven Research shows that an increase in gas tax results in a discouragement of driving behavior 8

9 Gas Tax vs. CAFE Neoclassical Labor Model: there are only two possible uses of time: labor and leisure. Each individual faces a trade-off to maximize his or her level of satisfaction (utility). Research has shown that gasoline consumption and leisure are complimentary components; Research also shows that an increase in gas taxes decreases gasoline consumption. Therefore, an increase in gas tax increases labor supply and efficiency. Gas tax increase shown to be more efficient than an increase in CAFE standards. Gas Tax Holiday Temporary reprieve in gas tax meant to encourage consumers to keep driving Tends to favor some industries and products over others In the long run, tax holidays put more burden on consumers $.01 reprieve will not lead to $.01 decrease in gas retail price unless paired with price controls Ineffective way of reducing gas prices Increases administrative and enforcement costs Raises taxes in other areas of the economy Interest Groups Pro-gas tax Environmentalists and Economists US contains 5% of world s population, but consumes 25% of world s oil What happens when the rest of the world wants their fair share? Alan Greenspan, former Fed chairman, supports gas tax increase because of national security issues Best way to reduce consumption Interest Groups Anti-Gas Tax Consumers and Conservative Politicians Discouraging convenience Question where money goes Bike & horse trails, landscaping, and preservation of historic buildings Since 1998, over $120 million for historic preservation and $50 million for transportation museums Oppose wage rates of construction workers paid by gas tax revenues Cost of construction inflated by Davis-Bacon Act (1931) regulations by as much as 38% Repealing Davis-Bacon Act would save $720 million Public Transit Proponents Revenues discourage use of buses Revenues should be used to enhance public transit system Economic Impact Concerns A major barrier to raising the gas tax Look at increases in 1983, 1990, and 1993 Specific concerns: Reduce economic growth or GDP At worst, no affect; at best, positive affect Cause inflation for consumers and producers CPI rises, but PPI falls; minimal effect Increase unemployment Rose after 1990, but fell after 1983 and 1993 Reduce labor productivity Remember less driving, more working Stock market downturn Increase in S&P index Gas Tax, Fuel-Efficient Vehicles, and AFVs States use gas tax as an important source of road financing Use of roads should directly determine equitable financing of construction and maintenance Called into question concerning higher fuelefficient vehicles and Alternative Fuel Vehicles. 9

10 Gas Tax, Fuel-Efficient Vehicles, and AFVs Other equity issues Frequency of vehicle use: some high efficiency cars drive more while some low efficiency cars drive less Interstate driving: vehicles from one state that drive through another often do not pay for roads used More direct pricing approach is desired Tolls Toll Roads Direct pricing Pay fees for use of road Congestion pricing More efficient use of roads Price determined by crowding and convenience Increase in congestion and convenience increases prices Response to tolls Overall negative response to tolling a free road; though more positive if tolled from the beginning Taxes for revenue vs. Prices for services Better responses when marketed as a service (convenience) Value Pricing Alternatives Tolls Gas tax vs. Tolls: Which is more progressive? Gas tax is a regressive flat tax in that it represents more of a percentage of income spent for the low-income But, generally seen as a user fee Tolls usually seen as more progressive flat tax because those that use it will be able to pay for it; But If only those that can afford it will pay it, sounds pretty progressive Time savings often outweigh costs: many low-income families willing to pay for less congestion Benefits Payers save time and get more efficient roads Non-payers get increased freeway capacity No effect on bus ridership Drawbacks More expensive to operate than gas tax system Double taxation Not proven to effectively replace gas tax Evaluation Is the tax producing benefits where benefits are needed? Is the gas tax more cost-effective than alternatives, such as tolls? Is the gas tax high enough to discourage environmentally and economically harmful behaviors? 10