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June 8, 2006
Take It Away and Give it Back: The History of Refundable Gas Taxes
Joseph J. Thorndike

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Plans for a Refundable Gas Tax Gain Popularity

Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail:

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America may be in the grip of a new energy crisis. Or it may not be. But we're definitely in the midst of a policy crisis, as lawmakers search desperately for some response -- any response -- to rising gas prices. Many of the proposed solutions have been bad, and some have been plain silly: Remember the $100 tax "rebate" that GOP leaders considered earlier this year?

While lawmakers seem focused on cutting energy taxes, policy mavens have endorsed the opposite. Proposals to raise the gas tax -- pegged at 18.4 cents per gallon since 1993 -- have found broad support among liberals and environmentalists. And according to a New York Times/CBS poll taken in January, 55 percent of Americans would accept higher gas taxes if they actually served to reduce global warming and dependence on foreign oil.

But politicians are understandably skeptical; the same poll found 85 percent of Americans opposed to a gas tax when divorced from its presumptive benefits. Clearly, any increase in the gas tax is going to be a hard sell, especially since the benefits will almost certainly appear long after the pain at the pump.

Americans have never been fans of steep energy taxes, and lawmakers who have supported them have had ample reason to regret their boldness. For a few brief moments many years ago, John Kerry pondered the virtues of a 50-cent gas tax. And for his pains, he suffered a slew of Bush attack ads during the 2004 presidential campaign.

Refunded Gas Tax?

But in recent months, we've seen a mini-groundswell of support for a different sort of gas tax: one refunded to taxpayers in the form of lower payroll or income taxes. Designed to offer politicians a way to avoid voter hostility, this idea has been advanced by a range of experts and political observers, including Cornell economist Robert H. Frank, Time magazine columnist Joe Klein, and New Yorker writer Dorothy Wickenden.

Generally speaking, the argument for a refunded gas tax is fairly straightforward. Higher gas taxes would encourage conservation, with all its attendant environmental and foreign policy benefits. Tax cuts, meanwhile, would improve incentives and offset the necessarily regressive effect of new energy levies.

The specifics of a rebated gas tax can vary considerably, however, depending on the expert making the recommendation. Some champions of the idea would use new gas tax revenue to pay for a cut in payroll taxes. Frank, for instance, has paired a $2 tax with a lower payroll tax (and an augmented Social Security payment for those already retired). Other rebate proponents would rather see a rollback in income tax rates. In 1999 President Bush's onetime economic adviser, N. Gregory Mankiw, suggested that a 50-cent gas tax could pay for a 10 percent cut in income tax rates.

The prize for novelty goes to New York Times columnist John Tierney, who has suggested that proceeds from a 50-cent gas tax could be used to finance private accounts for Social Security. "As much as Democrats hate private accounts," he wrote, "they couldn't complain that anyone was 'raiding' the Social Security 'trust fund' for these accounts." Using estimates from the Cato Institute, Tierney suggested that a 50-cent tax would raise $70 billion annually, allowing for a $440 deposit in every new private account.

Supporters insist that a rebated gas tax would command broad support, and any number of disparate characters have been said to favor the idea, including conservative economist Gary S. Becker and -- gasp! -- Grover Norquist. "If it were attached to one of the annual tax cuts that we've been passing so that the overall package reduced taxes," Norquist told Tierney of his gas tax cum private accounts proposal, "it wouldn't violate the no-tax pledge." Indeed, Tierney calls his plan the "solve-everything tax."

Not everyone is quite so enthusiastic. "An increase in the gasoline tax that was offset dollar-for-dollar by cuts in other federal taxes would not constitute a net tax increase," agreed economist Bruce Bartlett. And it might help reduce oil consumption by raising the price of gasoline relative to other commodities. "Assuming that political pressure to do something to reduce oil imports is almost irresistible, using the tax system this way might be preferable to alternatives such as rationing," he told Tax Analysts.

But Bartlett noted the rough justice involved in the idea of a rebate. "No doubt, one can design a rebate that broadly compensates people by income class, but what really matters is how much gasoline people use," he pointed out. "Those in urban areas may use very little because they have access to mass transit. For them, a rebate will be a windfall. Those who live in rural areas may find that a rebate only offsets a fraction of their higher gas tax bill because they are forced by necessity to drive long distances for work or basic necessities."

And Bartlett is particularly critical of using gas tax revenue to cut the payroll tax. "Are we assuming that only those with earned income pay the gasoline tax?" he asked. "Also, I have long objected to any proposals to cut the payroll tax -- either directly or through the back door -- unless it was part of an overall Social Security reform effort. In my view, the tax and benefits sides of that program are so intertwined that one cannot make changes to the tax side separately from the benefit side."

Carter's Standby Gas Tax

Many of Bartlett's concerns echo complaints about the last serious effort to design a refundable gas tax. In 1977 Jimmy Carter proposed a "standby gas tax" as part of his comprehensive energy plan. The proposal would have added 5 cents to the federal gas tax in every year that Americans failed to meet new, lower targets for gasoline consumption. If the country missed the target one year, the tax would go up. But if it hit the target the following year, it might actually go down.

New revenue from the standby gas tax -- should it ever materialize -- would be returned to taxpayers in the form of an income tax credit. Originally, Carter considered using the payroll tax for his refund plan, but he worried about the administrative burden it would place on the Social Security system. Ultimately, he opted for the income tax credit, pointing out that it would reach more people.

Essentially, the standby tax was a threat, although Carter preferred more sporting language. "Now if the American people respond to this challenge, we can meet these targets, and under these circumstances, this gasoline tax will never have to be imposed," he told Congress. "I know and you know that it can be done."

Carter suggested that many taxpayers would come out ahead after paying the tax and getting a rebate. If a family of four drove 10,000 miles a year in a car getting 27 miles to the gallon, Carter told skeptical reporters, then a 5-cent gas tax would cost them $91. But with his rebate pegged at a hypothetical $25 per person for every 5- cent increase in the tax, that family would save $100 on their income tax bill.

Those numbers were attractive, but Carter was a little fuzzy with his math. Notably, he refused to guarantee that "every nickel" of new gas tax revenue would be returned to taxpayers. "We still have to have some flexibility about exactly what we do," he told reporters. Bert Lance, director of the Office of Management and Budget, confirmed that administrative costs might prevent some gas tax revenue from finding its way back to the taxpayers.

Meanwhile, an anonymous "senior administration official" told reporters that some gas tax revenue would likely be used for other initiatives, including tax and welfare reform. In reporting the comments, the Chicago Tribune underscored its implications: "If the senior official's statement is true, it means the administration would use some of the tax money to achieve a redistribution of income -- taking some money from the rich and transferring it to the poor through the tax system."

The administration's mixed signals on the rebate quickly imperiled the proposal. "To be blunt about it," complained Republican National Committee Chair William Brock, "Mr. Carter's energy program looks suspiciously like a backdoor way of raising enough taxes to pay for more government programs and still balance the budget." The ranking minority member of the House Ways and Means Committee, Barber Conable, R-N.Y., was equally scathing in his remarks. "I find it incredible that this administration doesn't even know how much revenue it intends to raise from these taxes, how much it would return to the taxpayers, where the rest would be spent and who would be the beneficiaries," he said.

Even the administration's friends were critical. The New York Times took Carter to task for his evasive stance on the rebate: "Does he truly wish to cast the Federal Government in the role of a race track operator, taking a percentage of the handle off the top before paying the taxes back to the public?"

In testimony before the Ways and Means Committee, a parade of witnesses attacked the gas tax. The AFL-CIO complained that it was simply another regressive sales tax, replete with a poorly designed refund mechanism. "The per capita rebate for the standby gasoline tax is a haphazard and arbitrary transfer of income from those who must use their automobile to those who have other means of transportation," the group insisted. (In his own testimony, economist John Due lamented the hostility that organized labor directed at the gas tax, calling it the "head banging approach" to the problem of oil consumption: a "determination to keep gasoline cheap when this cannot be possible.")

Economist Gerard Brannon of Georgetown University dismissed the tax entirely. "The standby gasoline tax I do not take seriously," he said. If the rest of the energy plan actually worked, then the tax would never materialize. And if the rest of the program failed, then lawmakers would have to rethink the entire subject, not simply tack on a standby tax. "Voting on the contingency plan now does not seem sensible," he said.

The U.S. Chamber of Commerce also opposed the tax, first with great solicitude for the downtrodden, and then later with somewhat less. "It will place the greatest burden on those living in rural areas and those owning older cars and thereby would be a particular hardship on lower income groups," a chamber representative told lawmakers. And since rebates were not correlated with actual tax payments, "the program is not only inequitable, it is also little more than a new means of redistributing the wealth."

Many critics insisted that the tax would fail in its principal goal: curbing consumption. Demand for gasoline was far too inelastic to respond to such a tax, they predicted. Americans had already demonstrated their willingness to pay dearly for gasoline, continuing to buy at record pace even as prices climbed during the 1970s.

Ultimately, the standby gas tax succumbed to its critics. Ways and Means killed the idea, bowing to the pressure from industry, labor, and consumer groups. And voter hostility almost certainly played a significant part in dooming the levy. In a poll conducted by the Opinion Research Corporation just after Carter announced his plan, 57 percent of Americans opposed the gas tax, including its rebate provisions; just 37 percent supported it. In contrast, 60 percent favored another of Carter's proposed taxes: a new gas-guzzler tax on cars that failed to meet new mileage standards. In other words, Americans didn't hate all energy taxes. Just the rebated gas tax.

The defeat of Carter's gas tax provides a sobering counterpoint to the current enthusiasm surrounding the notion of a rebated gas tax. It may also help explain why politicians are not exactly flocking to the idea. But the gas tax proposal does seem attractive. And as pressure continues to mount for some sort of response to the nation's brewing energy problems, it may be among the more attractive alternatives. History may not be entirely reassuring for advocates of the idea. But then, contrary to popular belief, history doesn't always repeat itself.