Unleash incentives by taxing energy

The recent death of Jack Kemp allowed Americans to reflect on the power of ideas in the political marketplace. Rep. Jack Kemp, Sen. William Roth and President Reagan were the architects of lowering the top marginal income tax rate from 70 percent to 50 percent and indexing all tax rates for inflation. Those tax cuts provided enhanced incentives for work and investment and helped usher in a productivity revival that advanced living standards through the next two decades.

Today, Republicans appear to be in dire need of policy ideas worthy of memorial to Jack Kemp. President Obama, with his announcement of higher vehicle mileage standards, provides Republicans with an opening to offer a policy alternative that will harness incentives to foster a more productive economy.

The Obama diktat requires all new automobiles to get an average 35.5 mpg by the year 2016 and, according to Obama administration estimates, will add $1,300 to the price of every new car. While environmentalists applaud the higher CAFE (corporate average fuel efficiency) standards, President Obama's own National Highway Transportation Safety Administration forecasts that global mean temperature will decrease by only seven one-thousandths of a degree Celsius and prevent sea level from rising by only six one-hundredths of a centimeter relative to a baseline scenario.

A recent Rasmussen opinion poll taken from May 19 to 21 reports that 63 percent of Americans want greater vehicle fuel efficiency, with only 29 percent against. However, past attempts to increase vehicle fuel efficiency standards have been largely a waste, since greater fuel efficiency lowers the cost of driving one mile and unintentionally causes people to drive more miles. Imagine how driving habits would change if vehicles got only 4 mpg instead of 20 mpg.

Moreover, to meet fuel efficiency standards, automakers have had to offset their sales of highly profitable sport utility vehicles and trucks with cars that get high mileage but are of low quality compared to foreign competitors. These cars are often sold at a loss and might have irreparably harmed the reputation of the Big Three automakers.

Higher CAFE standards also have the unintended consequence of keeping older, dirtier and less fuel-efficient cars on the road for longer as consumers postpone purchases of higher priced new cars.

The past reluctance of consumers to buy smaller, more fuel-efficient cars has been primarily due to low gasoline prices. From 1981 to the present the real inflation adjusted price of gasoline fell approximately 35 percent, and consumers responded by driving more, even as CAFE standards increased.

What policy might Republicans offer? Increasing the excise tax on gasoline, or taxing carbon in general, would provide the right incentives for consumers to buy more fuel-efficient cars and for the car companies to make those cars. In addition to promoting greater fuel efficiency, such a tax would also ease congestion on highways as mass transportation and alternative modes of transportation become relatively less costly. The pollution costs of tailpipe emissions would also be reduced, helping promote cleaner air and healthier lives for children and those with cardiovascular disease.

For those people who think the Iraq war was about illicitly acquiring cheap oil, higher gasoline taxes would reduce the need for U.S. military interventions, as U.S. demand for foreign oil would fall. Furthermore, to the extent that higher gasoline taxes reduce consumption, part of the tax would be paid by the oil producers of OPEC, as oil prices would fall.

Finally, higher gasoline taxes would help reduce gas price volatility by reducing the percent of the price accounted for by oil costs. In just the past year gasoline prices swung from an approximate high of $3 a gallon to a low of $1.20, back to a current $2.30 level. Such price swings destabilize the economy and make effective transportation planning by households more difficult. In Britain and Japan, where gas taxes are higher, price swings due to changing oil prices result in a smaller percent change in prices at the pump.

The newly imposed CAFE standards pay lip service to environmentalists and will likely be a waste. While tax increases have been widely opposed by Republicans, those same politicians have largely lost credibility with the public regarding fiscal prudence. A path back from the political wilderness might begin by Republican policymakers once again recognizing the power of economic incentives.

Jack Kemp once promoted income tax cuts that promoted desirable economic growth and helped enhance living standards. Today, a tax policy that would reduce the undesirable consequences of gasoline and energy consumption would promote the right kind of incentives to enhance people's well-being. Such a policy would be a fitting memorial for Jack Kemp and might help breathe new life into a moribund party.

Bill Weber is a professor in the Department of Economics and Finance at Southeast Missouri State University.