James Coan
Princeton University
It seems simple. Increasing the price of gasoline with a flat tax should reduce consumption. It’s basic economics. Yet prices for gasoline have roughly tripled in the past decade, and consumption for gasoline continues to increase with only slight decreases in the rate of the change. Part of the reason that a purely economic incentive does not work is the income inequality in America. Those in the top quintiles can take the hit, and those in lower quintiles have little ability to change. Vehicles are still status symbols, and some people can still be proud of their gas-guzzling HUMMERS and Escalades (or to be fair to the domestic automakers, Tundras and Pathfinders as well).
Before I describe a policy I think can combat these issues, I want to emphasize that a tax is not the only way to reduce oil consumption, even if it should be a significant part of the answer. I can think of three major ways of how to reduce dependence on foreign oil: reducing oil consumption of passenger vehicles, reducing non-passenger vehicle oil use, and finding new domestic sources of fuel. I think very chronologically, so the first aspect can be divided into the lifecycle of a vehicle from its design all the way to its disposal. Cars must be designed efficiently, consumers make a purchasing decision, they then drive the vehicle, and they can be encouraged to dispose of their older inefficient ones. It all amounts to some easy alliteration – design, decide, drive, dispose.
I’ll discuss other policies in future posts, and you can read some in the 25 Ideas publication. But for now, here’s the creative and exciting policy idea from the drive category. It’s called the State Local Individual (SLI) tax, and it’s a fuel tax that falls as consumption falls and alleviates many of the flat tax problems.
The SLI tax works by first, oddly enough, implementing a flat tax. Then the changes begin. The country is divided up by county (or groups of counties to get to about 200,000 residents). Residents will get a tax refund or penalty on their income taxes depending upon the fall in consumption intensity (consumption divided by population) in both the county and state. Each year, the consumption intensity target gets more stringent. Federal funding for states is also contingent on the consumption intensity fall.
So how does the SLI tax remedy those flat tax problems? It encourages those who are well-off to conserve because it induces social pressure. Driving that HUMMER (or Highlander) is now not just a status symbol for those who can afford them. It also carries the stigma of callousness because by not changing, everybody’s taxes eventually rise. The vehicle says to one’s neighbors that the driver has the resources to change but has chosen not to and is unconcerned that neighbors will have to pay more. Lower-income individuals do not automatically benefit, but in a tax scheme like the SLI, most of the substantial revenue ($400 billion/year if a $2/gallon tax were levied) would be given back in the form of reduced payroll and income taxes. This additional revenue could be cycled back in a progressive manner (see this for an example of how it could be done with a carbon tax), and some of it could be kept and then offered as part of a buyback of inefficient older vehicles (see this for a description.)
It even contends with other problems of a flat tax – notably that it will result in a tax burden shift from cities to rural areas, and it does not directly incentivize states to change their behavior. With the SLI, counties are identified around the country, and some areas could initially get a tax break. (A fuel tax that gives preference for living in cities is beneficial, but the change cannot be done extremely suddenly.) Finally, states given the incentive to encourage their residents to conserve, or they risk losing funding.
The proposal has complexity, but we wouldn’t expect a simple answer to a complex problem.
