Gas Tax and Windfall Profits Tax

Today the price of oil drops to $33 per barrel. Gasoline prices in California are about $1.70 per gallon. These compare to the peak oil price of $146 per barrel and the peak gasoline price of about $4 per gallon.

China is considering a gasoline tax to keep the cost of gasoline at about the historically high level, and use the revenue from the gasoline tax to pay for highway tolls and maintenance.

In the US, gasoline tax is a fixed tax the cost of which is already included in the price of gasoline. To make the gasoline tax to have the effect of UDI-ism would require the gasoline tax to be much higher than what it is now in the US. It is a good idea to follow China and to impose a new gasoline public benefits charge (PBC) of about $2 per gallon. That will make the gasoline price at about $3.70 per gallon. At this price, consumers will be incentivized to save gasoline and switch to more efficient and smaller cars, etc. The $2 per gallon public benefits charge (PBC) should be credited directly to the name of the consumer. For example, if a consumer buys gasoline with his/her credit card, the $2 per gallon charge is credited to his/her public benefits account. People without credit cards can be credited with estimated gasoline purchases based on their vehicle mileage records, etc., in their annual tax filing forms. (There are other details which can be worked out to make it easy and verifiable.) The money in the public benefits account accrues in the account with interest until the account holder withdraws it for retirement or for emergency purposes. Therefore, even in today's recession/depression, the consumers can consider this charge as a mandatory saving for retirement, and not as taxes.

To be effective, this gasoline public benefit charge should be regulated quickly by the government to maintain a stable total gasoline price to consumers. For example, when the world oil price starts to go up due to market conditions, the government must reduce the gasoline public benefit charge accordingly so that the consumers do not face a big spike in the gasoline price.

To provide a stable investment environment for electric vehicles and smaller cars, it would be very helpful for the government to publish a target schedule for raising the gasoline PBC gradually over time, e.g., increasing from $2 per gallon to $3 per gallon over 5 years. Assuming that oil prices will go back to $140 per barrel after the recession is over, and may even continue to rise as world oil reserves continue to drop, gasoline prices without the PBC will go back up to $4 per gallon and higher. Therefore the total gasoline price will reach $7 per gallon, including $3 PBC.

Now the oil companies are naturally driven by their profit maximization goal. They may try to break the government’s will to keep the PBC charge high by driving the world spot market price of oil so high that the consumers will complain about the high PBC on top of the high gasoline cost due to world market price. Therefore, in order to maintain its ability to implement the gasoline PBC as a regulating variable to provide a stable investment environment for electric vehicles, the government should consider imposing a Windfall profits tax on the oil companies.

This piece is getting long, so I will continue on another day.