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22 IRET Congressional Advisory 1 (1993)

handle is hein.taxfoundation/iretcgadv0021 and id is 1 raw text is: June 17, 1993 No. 22 CONSERVATION AT ANY COST: INCREASING EXCISE TAXES ON MOTOR FUELS The Democrats on the Finance Committee are about to endorse a 4.3 cents per gallon increase in the federal excise taxes on gasoline and diesel fuels, and an extension of the 2.5 cents per gallon portion of the existing gasoline tax that was due to expire in October, 1995. These motor fuels tax hikes would reduce GDP by These motor ft some $9 billion in 1994 and ieduce GDP b' $16 billion by 1998. They 1994 and $1 would reduce employment by They would r& about 80,000 jobs in 1994 and about 80,000 110,000 jobs in 1998. 110,000jobs The Committee hopes to t ou nt by raise about $7.6 billion per year from these gasoline and diesel provisions by the late 1990s. The reduced use of motor fuels would offset about 8% of the revenue the tax increases would otherwise generate (an amount that may have been factored into the revenue estimate prepared for the Finance Committee). Not accounted for in the Congressional estimates, however, is the fact that the reduced employment and GDP growth would reduce payroll and income taxes, offsetting roughly 30% of the expected revenue from the motor fuels tax increases. The Committee would be lucky if the net revenues reached $5.5 billion per year. The GDP would fall by roughly three times the amount the tax would take in, making the fuel tax increase an extraordinarily inefficient way to raise revenue. There is no excuse for costing the private sector in excess of $20 billion in taxes and lost output when an equal amount of deficit reduction could be had by cutting government spending by about $5.5 billion. One reason that President Clinton gives for insisting on including some form of energy tax in his deficit reduction package is that it would encourage energy conservation. The conservationist justification for this tax increase invokes the paternalistic view that Americans use motor fuels in a wasteful manner. Conservation is not simply a matter of not consuming. It concerns the optimum timing of production and resources. At issue. ,els tax hikes would some $9 billion in billion by 1998. luce employment by e robs in 1994 and 1 1998... The GDP oughly three times tax would take in. consumption of exhaustible ,therefore, is whether the private market casts up correct or misleading signals concerning present and future demand, current and future costs of production, and the costs of storage. Although they never state it in this manner, the excise tax advocates are arguing that oil companies are charging too little for their product. This underpricing, so the argument goes, causes too much motor fuels to be consumed. The implication is that government can step in with an excise tax that would help establish the correct, i.e., higher, price. The tax hike advocates presume that the government can know enough about other people's needs to be able to judge for them what level of consumption is wasteful. The corollary is that the government is more farsighted than market participants and could establish the appropriate consumption rate with higher taxes. This argument is based on what Nobel prize winning economist F.A. Hayek has described as a pretense of Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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