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Many experts believe that gasoline taxes shouldbe increased for a variety of reasons. Their argu-ments are unpersuasive. Oil is not disappearing,and when it becomes more expensive, marketagents will substitute away from gasoline to savemoney. The link between oil price shocks andrecessions, although real in the 1970s, has beenmuch more benign since 1985 because of the ter-mination of price controls. Market actors proper-ly account for energy costs in their purchasingdecisions absent government intervention.Pollution taxes, congestion fees, and automobileinsurance premiums more closely related to vehi-cle miles traveled are better remedies for the exter-nalities associated with automobile travel than a simple fuel tax. Gasoline consumption does notnecessarily distort American foreign policy,impose military commitments, or empowerIslamic terrorist organizations.State and federal gasoline taxes should be abol-ished. Local governments should tax gasoline only to the extent necessary to pay for roads when usercharges are not feasible. If government feels com-pelled to more aggressively regulate vehicle tailpipeemissions or access to public roadways, pollutiontaxes and road user fees are better means of doingso than fuel taxes. Regardless, perfectly internaliz-ing motor vehicle externalities would likely makethe economy less efficient—not more—by inducingmotorists into even more (economically) ineffi-cient mass transit use.The arguments advanced against increasinggasoline taxes are applicable to the broader dis-cussion about America’s reliance on oil generally.The case for policies designed to discourage oilconsumption is nearly as threadbare as the casefor increasing the gasoline tax—and for largely the same reasons.
 Don’t Increase Federal Gasoline Taxes— Abolish Them
by Jerry Taylor and Peter Van Doren
_____________________________________________________________________________________________________
 Jerry Taylor and Peter Van Doren are senior fellows at the Cato Institute. Peter Van Doren is editor of 
Regulation
magazine and author of 
Politics, Markets, and Congressional Policy Choices
(University of Michigan Press,1991). They are contributing authors to
Energy and American Society—Thirteen Myths
(Springer, 2007).
Executive Summary 
No. 598August 7, 2007
� 
 
Introduction
Economists almost uniformly believe thatmarkets should be left alone by governmentunless market failures exist. They go on tocaution that government intervention willimprove efficiency if—and only if—theprospective intervention remedies one ormore of those market failures. And even if market failures exist, actual government poli-cies may not improve market operations,because politicians rather than economistsdesign the policies.
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The economic case for a gasoline tax is rel-atively straightforward. Gasoline consump-tion imposes costs on third parties. If gasolineconsumers had to compensate third partiesfor those costs, the total cost of gasolinewould rise, demand would fall, injured partieswould be made whole, and gasoline con-sumption would be optimal. But becausethose who suffer damages find that the trans-action costs associated with securing com-pensation are high, gasoline consumers donot pay for the burden they impose on others.Many economists believe that gasolinetaxes are too low relative to the external costsfuel consumption imposes on others and thatthe economy would be more efficient with a substantial increase in the federal fuels tax.That argument is embraced by conservatives aswell as liberals. For example, Harvard professorGreg Mankiw, a prominent free-market econo-mist and former chairman of President GeorgeW. Bush’s Council of Economic Advisers, hasrecently formed “The Pigou Club,” which ismade up of prominent economists and publicintellectuals who support an increase in thefederal gasoline tax.
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We examine those arguments and findthem unpersuasive. Some arguments for fueltaxes—such as the need for society to facilitatethe inevitable transition away from an oil-based economy, encourage energy conserva-tion, or reduce foreign oil imports—fail toconvince because they are unlikely to improveupon resource allocations that would occurabsent government intervention. Other argu-ments for fuel taxes are unpersuasive becausethey are second-, third-, or fourth-best reme-dies to problems—such as automobiletailpipe emissions and roadway congestion—that are best remedied by direct charges onoffending externalities.In fact, we find no compelling reason for a federal gasoline tax at all and call for itsrepeal. Nor do we find any compelling casefor state gasoline taxes. The only circum-stance in which gasoline taxes might makesense are those in which the transaction costsassociated with road use charges are so highthat gasoline taxes are the only reasonableway to pay for road construction and mainte-nance. This implies that fuel taxes are at bestmatters of local governmental concern andthat they should only be a fraction of currentcharges on motorists.This paper is primarily concerned withgasoline taxes, but the arguments we makeagainst the gasoline tax are applicable to thebroader policy discussion about oil’s place in American society. Although liberals and con-servatives, Democrats and Republicans,appear to agree that government should “dosomething” to move the country away fromoil consumption, the case for governmentalintervention is little different from—and nobetter than—the case for raising gasoline taxes.
Energy Depletion andFuture Generations
Because fossil fuels are exhaustible, somegasoline tax advocates argue that we need toration production in order to save resourcesfor future generations.
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Future generationshave no say in energy markets, but their pref-erences regarding resource availability in thefuture should be considered. Markets willnot provide that consideration, so govern-ment must do so. Another version of this argument doesnot emphasize the rights of future genera-tions. Instead, it paints a picture of inevitablefuture shortages as production declinesoccur. Fuel shortages will be accompanied by 
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Fuel taxes are atbest matters of local governmentalconcern andshould only be afraction of current chargeson motorists.
 
price hikes, recessions, and political struggle.Those unpleasant effects can be avoided only if government starts planning now. As a recent report for the U.S. Department of Energy put it, “Intervention by governmentswill be required, because the economic andsocial implications of oil peaking would beotherwise chaotic.”
4
Oil depletion concerns, however, rest onshaky ground. First, they are primarily aboutthe future availability of conventional crudeoil. Unconventional crude oil deposits—suchas those found in heavy bitumen, tar sands,and shale rock—are extremely plentiful andonly lightly tapped at the moment because of high extraction costs.
5
Moreover, the tech-nology exists to convert coal and natural gasto synthetic petroleum liquids, which meansthat other, more plentiful, fossil fuels couldbe harnessed to produce vast amounts of petroleum if the economics are favorable.Second, concerns that conventional crude oilis becoming scarce in any meaningful sensehave not withstood close scrutiny.
6
If petroleum depletion were to become a genuine problem, would intergenerationalequity demand conservation? We think not.The strongest normative argument againstconservation is that it transfers resourcesfrom the relatively poor to the relatively rich.
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That’s because today’s generation is almostcertainly much poorer than future genera-tions will be. For instance, if per capita income grows at 2 percent a year, people 100years from now will be approximately 7 timeswealthier than we are today. Those concernedabout intergenerational equity should worry more about standards of living today thanabout standards of living tomorrow.The strongest positive argument againstgovernment intervention is that markets aremore capable than government of reactingquickly and efficiently to declines in petrole-um production. True declines, rather thantemporary shocks, will permanently increaseoil prices, which will induce investments inalternative energy sources and conservation.But what about temporary (albeit multi-year) price shocks? If low prices most of thetime and high prices some of the time are a problem, is there a market solution? Indeedthere is. Long-term oil futures contracts areavailable to those who are worried aboutfuture price increases.The fact that marketers have not tried tooffer long-term stable prices to consumers by arbitraging between the futures and retailmarkets suggests that most consumersbelieve that they benefit by accepting low spot prices most of the time in return forunpleasantly high spot prices some of thetime. Said differently, we are “dependent” onoil exported from unstable countries ratherthan domestic oil or alternative sources of energy, and we don’t attempt to contract ourway out of that instability, because it ischeaper in present value terms to remain“dependent.”The “solution” to oil price instability is toaccept higher prices most of the time inreturn for lower prices some of the time.There is nothing wrong with such a trade-off as long as it is achieved through contract.Thirty-year fixed rate mortgages, for exam-ple, allow consumers to shift to others therisk of varying daily spot rates for borrowing(whose mean is lower but accompanied by higher variance) in return for higher meanand no variance (fixed) prices.We don’t, however, see those sorts of con-tracts in energy markets. Instead, what we seeare proposals for European-style taxes ongasoline consumption, mandated or subsi-dized alternative energy production, and reg-ulations that require energy producers toretain excess production capacity.Unlike contractual solutions, governmen-tal solutions have the dubious distinction of being more expensive not just most of thetime, but all of the time. That is, the “alterna-tives” to fossil fuels are more expensive thanconventional fossil fuels, even when the latterprices are at peak, which is, of course, why such “alternatives” are not embraced withoutgovernment subsidy or coercion. For exam-ple, we have recently calculated that the fed-erally owned Strategic Petroleum Reserve hascost the taxpayer between $65 and $80 per
3
Markets are morecapable thangovernment of reacting quickly and efficiently todeclines inpetroleumproduction.
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