Taxing our gas guzzling relapse

As gas prices fall, Americans seem to be using relief at the pump as an excuse to drive more. Could a gas tax bring unexpected benefits?

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By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Gas prices have plummeted 44% since peaking at over $4 a gallon this summer, and are now averaging around $2.30.

There's some evidence suggesting Americans are using the savings not to buy groceries or make home payments, but instead to drive more. That may, in turn, drive up demand and push prices right back up.

So while gas prices are still well below $3 a gallon, is now the time to pass a gas tax in an effort to keep demand down?

And will a President Obama, who wants to cut greenhouse gas emissions, have the political firepower to call for a tax that most politicians are unwilling to discuss - even though many economists say it would be the most efficient way to reduce global warming?

"There's no question, it will be successful as a way to cut consumption," said Gary Becker, a Nobel Laureate economist at the University of Chicago. "It's certainly a better time to enact it, than when gas was at $4 a gallon."

To those who support a gas tax, cutting consumption has many benefits.

First, it reduces greenhouse gas emissions. It also helps alleviate congestion and eases the burden on the country's aging roads and bridges.

While it is likely to raise prices immediately, the tax would also simultaneously act to reduce consumption, so the market price for gas would likely fall. That would mean less money for OPEC or Exxon Mobil.

If the government raised the gas tax by $1, that's about $140 billion dollars a year that could be used for schools, roads, or whatever the feds wanted to spend the money on.

"If we can cut gas consumption, we can cut oil imports and we cut how much (money) we send to overseas nations," said Becker.

As gas prices passed $4 a gallon this summer, there was ample evidence that Americans were driving less.

Sales of big cars and trucks plummeted. As fall approached, it was clear Americans were changing their driving habits.

Numbers complied by MasterCard's SpendingPulse market report showed gas consumption falling by as much as 9% in early October, a deeper decline than the 4% or 5% seen throughout the summer. Government figures for October showed a drop of over 4%, also outpacing earlier government estimates.

Americans love to drive

Gas prices have fallen sharply since the summer and Americans once again are getting behind the wheel.

The latest MasterCard report shows a drop of only 4%, while government figures show a decline of 2.5%, despite an economy that only appears to be getting worse.

Sales of trucks are improving. J.D. Power and Associates say that the most recent figures show that of people buying new vehicles, a greater number are buying trucks compared to previous months.

While the renewed interest in truck sales is partly due to bigger incentives and pent-up demand, falling gas prices most certainly played a part.

There's got to be another way

A gas tax is of course just one way of cutting consumption, and some feel it's too crude a tool.

"It wouldn't be the most efficient way to decrease energy demand," said Chris Lafakis, an economist at Moody's Economy.com, an economic consultancy.

Lafakis feels gas demand is too inelastic to be reduced with a tax - that is, people live too far from work and have to drive no matter how high the price.

A better way to reduce oil consumption, he says, would be for the government to promote different fuels - like natural gas, biofuels, or electricity.

With at least $25 billion promised to U.S. automakers, he feels that the feds have ample leverage to get them to build cars that use less gas.

There are also those that downplay the dangers of global warming and say what the country needs is more energy at a cheaper price.

"You do not get more energy by taxing energy," said David Kreutzer, an energy economist at the Heritage Foundation, a conservative think tank. "The damage to the economy is fairly significant, while the case for catastrophic global warming just doesn't hold water."

There's also the criticism that a gas tax is regressive - it hits poor people more than rich ones. Now would be a terrible time for a new tax, with people losing jobs and the economy on the skids.

But proponents say a gas tax need not be a new tax, just a shift in taxes.

Andrew Samwick, an economic professor at Dartmouth, suggested lowering the payroll tax - which evaluated from an economists' standpoint discourages people from working, and replacing it with a gas tax, which would discourage people from driving.

"Is there anybody who would actively promote the reverse," asked Samwick.

Gas tax? Don't bet the farm

As to whether Obama or the new Congress would attempt such a thing, no one spoken to, for this story, thought it was likely in the short term.

A spokesman for Obama said they were too busy dealing with the transition right now to comment on policy matters.

Politicians have long resisted a gas tax, simply because they fear voters will kick them out of office for passing such a blatant tax.

Obama would be better off dealing with a more politically popular problem, like health care, said Samwick, in order to get some momentum rolling in his administration.

As for Congress putting their neck on the line and picking up with a gas tax, "you would have to invent a negative number for probability," he said.

Did you vote for Obama? How do you think the new president will affect your wallet? What do you think Obama needs to do to fix the economy - both in the short run and the long term? What should be first on the new Congress's agenda? E-mail us your thoughts, including your name, photo and contact info; the best answers will be featured in an upcoming CNNMoney.com article.  To top of page

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