Gas prices high — but not high enough
A stiff tax increase and $4-a-gallon fuel could end Americans’ addiction to gas-hogging SUVs and curb dependence on OPEC. But don’t count on politicians to line up for higher taxes.
Video on MSN Money: Strott on the street
Gas prices are at an all-time high as the summer vacation season quickly approaches. MSN Money’s Elizabeth Strott hit the streets to see how drivers feel about the pinch at the pump.
This article originally appeared in David Kiley’s Auto Beat blog on BusinessWeek.com.
The average price of a gallon of gas is now above $3. That’s affecting some car buyers’ choices, as it has done whenever gas prices have spiked in the past two years. But it’s still not high enough to spur the needed transformation of the U.S. auto fleet to much higher average fuel economy.
And that brings me to gasoline taxes, the one obvious measure that would move the U.S. to energy independence from the Organization of Petroleum Exporting Countries and substantially limit U.S. exposure to the political and ideological whims of the Middle East and Venezuela.
But don’t hold your breath. Republicans running for the White House are lining up to take pledges for no new taxes, no matter how badly they are needed. Connecticut is actually rolling back its state gas tax by 5 cents a gallon to throw a bone to voters. Oh boy — 5 cents! Ridiculous!
Democrats are showing no more courage, though they are talking more about the need for greater fuel economy. Sen. Chris Dodd, D-Conn., a presidential hopeful, is pushing for carbon taxes on auto makers. But he has said recently that "direct" taxes on consumers/voters aren’t (politically) feasible. So much for "Profiles in Courage."
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Conversations I have had with congressional staffers and one prominent Democratic congressman tell me that polling data going back to the 1980s shows that no tax increase would be more unpopular with voters than a gas-tax increase.
It’s working for Europe
Europe has an average fuel economy for its new-car fleet of more than 40 miles per gallon. The European Union years ago amassed support among members for high taxes on gasoline, which drove a swift migration from big cars to smaller cars and to diesel fuel. The result: less dependency on OPEC and cleaner air in the cities.
A congressional staffer told me that to get a gas-tax increase across to the American voter, the president would have to drive a bipartisan effort, with the Democratic and Republican leadership of Congress standing behind him as he addressed the country in a series of speeches explaining the need for a higher gasoline tax, and that both parties would have to sign an agreement that neither side would use the tax against the other party in ads or rhetoric.
How likely does such a photo op appear?
The rhetoric today is about hydrogen by 2030, ethanol and biofuel, carbon taxes and such. It’s all about everything that puts higher fuel economy off for perhaps two decades. But we know that if we slapped a gas tax of, say, $1 to $1.50 per gallon on today’s gasoline, legislated a price floor on oil of, say, $50 per barrel to keep gasoline above $4 per gallon, there would be mass trading of SUVs and pickups for smaller, more-fuel-efficient vehicles. And there would be a rapid flight of popularity for vehicles that ran on clean diesel fuel.
Auto companies would like to see this gas-tax strategy adopted. Most environmentalists support the gas tax, too. It’s a proven way to achieve rapid fuel economy. Auto makers just want some predictability in the marketplace, like they got in Europe, so they know what vehicles to make for American tastes and demands. In short, they build big SUVs and high-horsepower vehicles because that’s what the public wants when gas prices are low.
Gasoline prices have surged in recent weeks to a record nationwide average of more than $3.20 per gallon, surpassing the previous record of $3.07 per gallon set in September 2005, according to the U.S. Energy Information Administration.
A ‘gradual’ shift in buying
As gas prices rise, owner loyalty in the large-pickup and midsize- and large-utility-vehicle segments drops, according to data gathered by the Power Information Network between February and April. Owner loyalty is measured by the percentage of owners in any given segment who trade for another vehicle in the same segment.
"We’re seeing a broad, long-term — but gradual — movement to smaller vehicles," says Tom Libby, the senior director of industry analysis for the Power Information Network. "For example, during periods of high gas prices over the past two years, we’ve seen movement from larger to smaller SUVs. However, the total SUV pie remains largely intact."
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Additionally, sales of small vehicles, including cars and light trucks, as a percentage of new-vehicle retail sales, have risen from 26.3% in the first quarter of 2004 to 31.8% in the first quarter of 2007.
That’s a start. But consumers won’t trade the Ford Expeditions, Toyota Sequoias and Chevy Tahoes that they don’t need until gasoline is permanently more than $4 per gallon. The people who really need those vehicles for ranching and boat towing will buy them no matter what.
The new tax money could go to tax offsets for lower- and lower-middle-income consumers and to invest in new energy infrastructure in the U.S. That makes sense. This is not an original idea, but the gas tax could be called a "patriot tax" to exempt it from political wrangling.