Opinion: Daily Journal

The Artifice of the Deal

RALEIGH – To learn something important about today’s public-policy debate, consider the following proposed compromise on issues of global warming, wasteful spending, and highway congestion – and how politics would probably collapse it.

First, here’s the deal:

Triple the tax rate on motor fuels. In North Carolina, the combined rate (federal + state) was just shy of 50 cents for a gallon of gasoline last year. It was about 55 cents for diesel. Imagine that the rates would go to $1.50 and $1.65 respectively. Nationally, a two-year-old estimate is the latest I can find for the combined revenue from federal, state, and local taxes on motor fuels. It was around $70 billion.

Now, you can’t just assume that if the current tax rate raises approximately $70 billion a year, a tripled tax rate would raise $210 billion. Obviously, motorists would respond to the higher price by a combination of traveling fewer miles, carpooling, riding public transit, and purchasing more fuel-efficient vehicles. Those convinced that the current trend in global temperatures will lead to calamity, and that changes in human behavior can significantly alleviate the calamity, should welcome such consumer responses, as they would reduce carbon emissions. But they would also reduce fuel-tax collections. Just for the sake of rough approximation, imagine that the real revenue increase would be about 150 percent, or $105 billion a year.

Dedicate the entire revenue gain to transportation infrastructure. Traffic congestion is a serious and escalating problem with sizable costs in time, money, highway safety, and air quality (stationary engines are more environmentally deleterious than moving ones). Investing in maintaining and expanding the nation’s roadways is critical to addressing issues of congestion and mobility. To make the deal work, factor in some percentage of the new revenue to be devoted to transit options such as dedicated bus lines and van pools that flexibly and economically address the mobility needs of the poor, the disabled, and those who choose to live in dense, transit-suitable neighborhoods.

Fully offset the cost of the higher fuels tax. The tax burden as a whole is already too high. In particular, there is an excellent case to be made that both federal and state income tax rates remain excessive, particularly on flows of income that are taxed two or more times, such as returns on investment. At the state and local level, many tax systems – North Carolina’s among them – are at least mildly regressive because of a reliance on outmoded sales taxes that apply only to goods, not services. Rather than attempting to “reform” these narrow-based consumption taxes to get more money, a wrongheaded effort doomed to fail, let’s whittle those sales-tax rates down.

Fully offset the fiscal impact of the income and sales tax cuts. On two areas of government spending, at least, most policy analysts across the spectrum agree that the expenditures are unfair or do more harm than good. These are corporate welfare and agriculture subsidies. Programs that pay companies direct grants, subsidize their international marketing efforts, or otherwise compel taxpayers to shoulder corporate costs of production and sale are grossly inequitable and distort the free market in ways that cost consumers and workers in other ways. Similarly, farm programs subsidize a few, relatively wealthy farms and agribusinesses at the expense of consumers and competitors in developing nations, while exacerbating problems such as inadequate water supply and soil erosion.

Eliminating federal and state subsidies for corporations and agriculture would easily generate the savings need to make the deal work. The Cato Institute just estimated the on-budget cost of federal corporate welfare (including direct farm payments) at $92 billion a year. State spending and the off-budget savings to consumers from lower food prices and such would likely total at least $30 billion. Indeed, because the total savings would likely exceed that needed for income and sales tax cuts to offset the gas tax hike, policymakers should take the opportunity to cut income and sales tax even more.

The proposed deal, then, would 1) make the consumption of fossil fuels more expensive, thus creating incentives for people to take actions that reduce carbon emissions (and improve other air-quality measures, though most of these are already improving); 2) finance necessary investments in transportation infrastructure with tangible economic and quality-of-life benefits; 3) end wasteful, outrageous government subsidies for corporations; and 4) leave taxpayers no worse off, and likely a bit better off.

Unfortunately, its political prospects wouldn’t be good. Smart Growthers and environmental extremists would savage the additional highway investment and demand choo-choo trains. Many opportunistic politicians of both parties would raise a ruckus about the higher gas tax while downplaying the offsetting tax cuts. There would be some tricky issues in coordinating federal and state government expenditure and revenue offsets. Fiscal conservatives would (properly) doubt that politicians would stick to the deal — that they would just raise income and sales taxes back up in the future. And lobbyists for subsidized companies would fight tooth and nail to preserve their welfare.

That’s what would happen. Right?

Hood is president of the John Locke Foundation.