The Net-Zero Gas Tax

What to do? Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly--that is why this proposal is different from others--immediately renders the average gasoline consumer financially whole.

Here is how it works. The simultaneous enactment of two measures: A $1 increase in the federal gasoline tax--together with an immediate $14 a week reduction of the FICA tax. Indeed, that reduction in payroll tax should go into effect the preceding week, so that the upside of the swap (the cash from the payroll tax rebate) is in hand even before the downside (the tax) kicks in.

The math is simple. The average American buys roughly 14 gallons of gasoline a week. The $1 gas tax takes $14 out of his pocket. The reduction in payroll tax puts it right back. The average driver comes out even, and the government makes nothing on the transaction. (There are, of course, more drivers than workers--203 million vs. 163 million. The 10 million unemployed would receive the extra $14 in their unemployment insurance checks. And the elderly who drive--there are 30 million licensed drivers over 65--would receive it with their Social Security payments.)

Revenue neutrality is essential. No money is taken out of the economy. Washington doesn't get fatter. Nor does it get leaner. It is simply a transfer agent moving money from one activity (gasoline purchasing) to another (employment) with zero net revenue for the government.

Revenue neutrality for the consumer is perhaps even more important. Unlike the stand-alone gas tax, it does not drain his wallet, which would produce not only insuperable popular resistance but also a new drag on purchasing power in the midst of a severe recession. Unlike other tax rebate plans, moreover, the consumer doesn't have to wait for a lump-sum reimbursement at tax time next April, after having seethed for a year about government robbing him every time he fills up. The reimbursement is immediate. Indeed, at its inception, the reimbursement precedes the tax expenditure.

One nice detail is that the $14 rebate is mildly progressive. The lower wage earner gets a slightly greater percentage of his payroll tax reduced than does the higher earner. But that's a side effect. The main point is that the federal government is left with no net revenue--even temporarily. And the average worker is left with no net loss. (As the tax takes effect and demand is suppressed, average gas consumption will begin to fall below 14 gallons a week. There would need to be a review, say yearly, to adjust the payroll tax rebate to maintain revenue neutrality. For example, at 13 gallons purchased per week, the rebate would be reduced to $13.)

Of course, as with any simple proposal, there are complications. Doesn't reimbursement-by-payroll-tax-cut just cancel out the incentive to drive less and shift to fuel-efficient cars? No. The $14 in cash can be spent on anything. You can blow it all on gas by driving your usual number of miles, or you can drive a bit less and actually have money in your pocket for something else. There's no particular reason why the individual consumer would want to plow it all back into a commodity that is now $1 more expensive. When something becomes more expensive, less of it is bought.

The idea that the demand for gasoline is inelastic is a myth. A 2007 study done at the University of California, Davis, shows that during the oil shocks of the late 1970s, a 20 percent increase in oil prices produced a 6 percent drop in per capita gas consumption. During the first half of this decade, demand proved more resistant to change--until the dramatic increases of the last two years. Between November 2007 and October 2008, the United States experienced the largest continual decline in driving history (100 billion miles). Last August, shortly after pump prices peaked at $4.11 per gallon, the year-on-year decrease in driving reached 5.6 percent--the largest ever year-to-year decline recorded in a single month, reported the Department of Transportation. (Records go back to 1942.) At the same time, mass transit--buses, subways, and light rail--has seen record increases in ridership. Amtrak reported more riders and revenue in fiscal 2008 than ever in its 37-year history.