How would consumers feel about the Federal government tripling the gas tax?

Even the previous 4-cent increase in the gas tax was controversial.  Now suppose the federal gasoline tax (currently 18.4 cents) was tripled.  I’d expect consumers to freak out over the news.  And yet even a 37-cent increase is relatively small compared to some of the wild gyrations in gas prices that we’ve seen in recent years.  So why would the reaction be so strong (assuming that I’m correct?)

I think the answer is that consumers know that gas prices gyrate up and down, but also that a gas tax is permanent.  Thus future gyrations would be around a trend line that is 37 cents higher than before.

Commenter Plucky directed me to a very good Tax Foundation article on the proposed border tax.  This caught me eye:

Another consequence of dollar appreciation is that debts denominated in U.S. dollars will become more expensive in foreign countries. This is because a foreign country or business would need to raise money in the local currency and convert it into more expensive dollars to pay the debt. Emerging markets may be hit hardest by this.[33] However, many policy changes in the United States and natural movements in the market have impacts on the value of the U.S. dollar that could impact dollar-denominated debts.[34] It isn’t clear why a border adjustment would be a special case.

I’d make two points here:

1.  A border tax would be relatively permanent.  The dollar would continue to fluctuate over the business cycle, but (so it is claimed) around a 25% higher trend line.  That’s a lot.  For instance it would give Canadian tourism a big advantage over American tourism.  Hawaii would find it harder to attract Asian tourists.  Ditto for Florida vs. the Bahamas.  It certainly won’t destroy our tourism industry, but don’t assume that 25% is not a big deal—it is.  How about our airlines?

2.  In the past, a strong dollar has often been associated with a relatively strong US economy.  Thus the pain of emerging markets having to repay dollar debts at a higher rate is partly offset by strength in EM exports.  This would be different, a sudden 25% jump in the cost of repaying debt, without the associated macro benefits.  Again, I’m not saying it would necessarily cause a debt crisis, but don’t assume that adding 25% to trillions in dollar debts is not a big issue.

PS.  I actually think the tax reform proposal has a lot of merit. Debt and equity would finally be on a level playing field.  But I still have a few lingering doubts about suddenly imposing an exchange rate shock of that size.  (Perhaps because I own some overseas mutual funds.  But then even US multinationals will see foreign profits translated back into US dollars at a considerably lower value, and yet the US stock market seems to be doing fine.  So who knows?)



29 Responses to “How would consumers feel about the Federal government tripling the gas tax?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    24. February 2017 at 19:39

    I also puzzle the why the extreme taboo on gasoline taxes. Of course, it is a visible tax, easily understood.

    Yet much of the taboo has to to so with two Senators from every rural state, and rural residents have to drive longer distances and cannot use mass transit. So right there is powerful block against federal gasoline taxes.

    Those same people are happy to mandate corn ethanol by 10% in your gasoline however, which raises costs. Ethanol takes up about 40% of cornfield production and corn prices went up after federal mandates to use corn ethanol went into place, and never came back down. Meat is more expensive too, as a result and down the line. Corn fructose etc.

    I have long suggested the federal gasoline tax be raised by some modest amount—say a nickel–every year, on a 20-year schedule. Put that suggestion in the bin along with eliminating property zoning.


    In the real world, I think the exchange rate of the dollar has less to do with tax codes than with monetary policies.

    The Tax Foundation study strikes me as at war with itself, and with the present-day “free trader” argument.

    Free traders (and the Tax Foundation article) say one reason that dollar does not depreciate despite chronic and large trade deficits is that the money flows back into America, in the from of investments (the buying of real estate the most prominent example).

    So a smaller or larger trade deficit would just be offset by smaller or larger capital flows. Right?

    Then the Tax Foundation says smaller trade deficits (due to a border tax) would result in a stronger US dollar. Huh?

    Jeez, my head is spinning. So, huge trade deficits do not lead to a weaker US dollar, but smaller US trade deficits would lead to a stronger US dollar?

    And monetary policy is…on the moon during all of this?

    The real story: Smaller US trade deficits may or may not play a role in the dollar exchange rate.

    But smaller trade deficits would probably relieve pressure on real estate prices that cannot be otherwise relieved, due to property zoning restrictions.

    I am not giving the PC view, but I think I am accurately summing up the facts on the ground.

  2. Gravatar of Scott Freelander Scott Freelander
    24. February 2017 at 19:43


    I think the stock market seems to be doing fine, because the border adjustment tax is DOA. Did you see the blip in retail stocks today related to the further falling prospect of its passage?

    This is a bad idea. Just zero out corporate taxes and shift the burden to the wealthy.

  3. Gravatar of Scott Freelander Scott Freelander
    24. February 2017 at 19:48

    Here’s a link about the retail bump today, just after some news interpreted as revealing a lack of Trump support for the border adjustment tax:

    Further, I’ve read that even many Republicans find the tax proposal complex, risky, and are feeling heat from retailers, the tourist industry, etc.

  4. Gravatar of Jerry Brown Jerry Brown
    24. February 2017 at 20:29

    I am with Benjamin Cole and his excellent comment.
    Forty years of trade deficits haven’t led to a weak dollar but some border tax is going to raise the value by 25%?? Not buying it.

  5. Gravatar of Bob O’Brien Bob O'Brien
    25. February 2017 at 00:39

    Thanks for the info on the pending tax changes.

    As a small business person I find these border tax proposals overly complex and likely to result in a drastic reduction in imports.

    For example, I am associated with a UK firm that owns a USA corporation whose sole purpose is to import products from the UK and sell them in the USA. It appears to me the border tax plan would mean that the USA firm would have to raise prices by at least the amount of the border tax (i.e. 20% ?) which is likely to drastically reduce the amount they are able to import.

    Is my reasoning above correct or am I missing something?

  6. Gravatar of JMCSF JMCSF
    25. February 2017 at 05:01

    As long as the gas tax is being earmarked for infrastructure I’m all for raising it (maybe offset income taxes?).

    The border tax sounds pretty complex. Even if republicans went through with it, would they be able to implement a policy that is coherent and works? I doubt it. Nothing republicans have done so far gives me much cofidence. Just stick to something simple – lower rates, cut out some loop holes etc.

    PS, it’s sure nice the trolls aren’t out yet 🙂

  7. Gravatar of Negation of Ideology Negation of Ideology
    25. February 2017 at 06:06

    I must be missing something with this border adjustment tax and currency adjustment discussion. Consider three hypothetical countries:

    Country A has a 20% Origin based VAT.
    Country B has a 20% Destination based VAT.
    Country C has a 20% Origin based VAT, plus a 20% tariff, plus a 20% export subsidy.

    Country B and C seem to be exactly the same thing to me. But C would be considered protectionist by almost everyone (including the WTO) and B wouldn’t. But if moving from A to B has no effect on trade because the currency will adjust, then moving from A to C would also have no effect on trade because of currency adjustment.

    If that’s true, then tariffs and export subsidies have no effect on trade and aren’t protectionist either, because of currency adjustment. But that goes against almost all I’ve read about the subject.

  8. Gravatar of bill bill
    25. February 2017 at 07:06

    Predictability. That’s one of the sweet, subtle benefits of NGDPLT.
    Which leads to me to this comment on tax proposals. Predictability has value. We read about the menu costs of 3% inflation (they seem trivial to me). Changing the tax code imposes costs on the real economy. Encouraging this, discouraging that. And the time, effort, studying, needed to learn the new systems. Clearly our system could be better. But most of the time, leaving things as they are or just making some modest changes around the edges would be a better approach than the changes we end up with.

  9. Gravatar of Alex Godofsky Alex Godofsky
    25. February 2017 at 07:36

    Negation of Ideology: tariffs and export subsidies have no effect on trade and aren’t protectionist *when paired equally*. A tariff by itself reduces international trade (and raises revenue); an export subsidy by itself increases international trade (and costs money); paired, they cancel each other out (except for the change in the exchange rate).

  10. Gravatar of Alex Godofsky Alex Godofsky
    25. February 2017 at 07:41

    Ultimately, the border tax seems complex to a lot of people but it really isn’t. Here is something exactly equivalent:

    1. Repeal current corporate income tax.
    2. Pass 20% VAT.
    3. Enact a 20% wage subsidy.

    None of these seem particularly confusing or dangerous (in a “you will destroy the economy through unforeseen consequences” sense) individually. They don’t become any more so when added together. Their effects add, not multiply.

    (And the effect is to repeal the broken corporate income tax and replace it with a consumption tax that only hits consumption financed by previously accumulated capital – which is very progressive.)

  11. Gravatar of d d
    25. February 2017 at 11:25

    oddly enough if we just raised the gas tax .05, we would fix our road problems, but then we dont really want too do we ? not really. course if you just raised in once, and then raised it based on oil prices, you would also get a lot of interest in better few economy. but then if you do the ‘border tax’ you will actually raise gas prices even faster as oil went up, leading to better gas mileage for all vehicles.

    the odd thing is that the gas tax on most states is higher than the federal one. care to guess which most complain about? and why do they do that?

  12. Gravatar of engineer engineer
    25. February 2017 at 13:58

    “Those same people are happy to mandate corn ethanol by 10% in your gasoline however, which raises costs. Ethanol takes up about 40% of cornfield production and corn prices went up after federal mandates to use corn ethanol went into place, and never came back down. Meat is more expensive too, as a result and down the line. Corn fructose etc.”

    B. Cole….As I tried to explain to you previously….Ethanol does not take anywhere near 40% of cornfield production. Corn acreage has only increased 10% since ethanol was mandated and that is 10% less than the acreage back in the 1930s. 50%+ of the grain that is sent to the Ethanol plant gets turned into high protein meal for cattle. Ethanol has partially solved the problem of habitual over production by American agriculture…longer term it has little impact on the price. In inflation adjusted terms, the price of a bushel of corn is 1/4 of what it was in the early 70s and has been declining for 100 years, the introduction of ethanol was a little blip in this longer term trend…

    Obviously one reason people don’t like gas taxes is that, besides cigarette taxes, it probably the most regressive tax I can think of. It punishes people who make need to use more gasoline for their livelihood. Most people who advocate high gas taxes are doing so to make alternative, more efficient or cleaner forms of transportation more economically viable…not to raise money for infrastructure. Those are the same people who mandated ethanol…so I think you have it reversed. Those blue collar folks that hate gas taxes also hate ethanol as they hate ultra-low sulfur diesel (ULSD) (which by the way increased the price of diesel way beyond any increase to gasoline that ethanol caused, but greatly improved air quality).

  13. Gravatar of Major-Freedom Major-Freedom
    25. February 2017 at 16:43

    How would consumers feel about the Federal government tripling the gas tax?

    Yeah, it is much better for state power if the tax was stealthily collected by way of inflation financed spending and devaluation of the consumer’s cash and earnings in a more imperceptible manner.

    Then the billions and billions spent on illegal immigration and welfare can be pretended not to exist

    Go anti-market monetarism!

  14. Gravatar of Ray Lopez Ray Lopez
    25. February 2017 at 17:34

    Sigh. Does our host even read other blogs? He’s marching to his own drummer, an island to himself.

    1. (Thai turkey farmer) Ben Cole, (Gov) Jerry Brown are right: if you’ve read Tyler Cowen’s blog “MR” you’d know the “25% dollar appreciation on a border tax” is speculative. Two different cites there, one to GM K. Rogoff and one to AEI’s Alan J. Auerbach “Border Adj and the Dollar” 2/17, point out the 25% first-order simple rule is probably incorrect. But our host doesn’t read the literature, he asks his gut and posits, like his NGDPLT?

    2. @Ben Cole – prices of corn have come down from 2013 highs, as ‘engineer’ implies, see: Do try and keep up, you sometimes come across as ignorant as our host, no offense.

    3. As Scott Freelander implies, and as stated in Tyler Cowen’s MR blog today, the ‘border tax’ is DOA (dead on arrival). Do keep up with the press Prof. Sumner.

    Any other questions? Fine. Class dismissed. (Ironically Sumner is the professor but I’m doing his job)

  15. Gravatar of dtoh dtoh
    25. February 2017 at 18:23

    1. Border tax and gasoline tax are regressive.
    2. Stop taxing specific activities (i.e. driving). Government is notoriously bad at picking winners and/or identifying externalities.
    3. VAT and border tax are huge admin burdens for businesses.
    4. Eliminate all corporate tax and implement a progressive consumption tax (national sales tax on personal consumption.)
    5. One of the goals of any new tax should be to generate massive unemployment for lawyers, accountants, and lobbyists.

  16. Gravatar of Benjamin Cole Benjamin Cole
    25. February 2017 at 21:00

    Engineer (If Ray Lopez can read this without moving his lips, he is allowed to read also):

    Well, Scientific American said 40% of corn is used in biofuels.

    Corn prices skyrocketed with the Bush jr. Administration push into ethanol, which was not reversed by Obama.
    Since 2012, corn prices have come down, but it looks like the new floor at about 50% to 100% higher than the old norm. See FRED series:

    America’s most valuable cropland is corn.

    But of course, the real reason is not support corn ethanol is that the market does not support it. I prefer, where possible, free markets. Environmental issues need to addressed through taxes.

    Tax pollution, in other words.

    I confess a weakness for ethanol in this regard:

    Robert Rapier has suggested corn states either mandate or strongly incentivize the use of E-85. That’s an idea.

    My idea is all ethanol-PHEVs. An all ethanol-PHEV, used by an urban consumer might use so little ethanol that the cost of the fuel becomes relatively unimportant.

    In my fantasy scenario, America “nukes up” a lot of power plants, wind and solar too, and goes to ethanol as the main liquid fuel. A fun idea, and the money we would save be getting out of the Mideast would probably pay for it many times over. There are new and better nuke plants out there, btw.

    But as it stands now, we have a federally subsidized corn ethanol fuel (subsidized on many levels), mandated in use by federal diktat, and which when blended with gasoline lowers MPGs.

    I support gasoline taxes as a tax on pollution and to pay for infrastructure.

  17. Gravatar of Benjamin Cole Benjamin Cole
    25. February 2017 at 21:10

    Egads, talk about being out in left field–all of us! Including Ray Lopez!

    Looks at this FRED series chart on the exchange rate of the US dollar.

    We are near all-time record highs, and nearly four times as high as 1970!

    This chart is hard to believe. But there it is.

    As for the exchange rate and inflation—forget about it.

    US inflation was lowest when the dollar was depreciating from 2000 to 2011.

    The dollar appreciated mostly in the 1970s and 1980s, when we had moderate inflation.

    Orthodox macroeconomics does not make much sense in light of this chart.

    There are major puzzles out there. How can Japan have deflation when it is liquidating its huge national debt?

    Why did US inflation hit all-time lows when the Fed did $4 trillion in QE?

    Why has the US dollar generally appreciated for more than 40 years, to a level four times 1970s levels, while the nation has run larger and larger trade deficits?

    Should the US print up a few trillion dollars and buy government bonds of other nations? Use the resulting interest flows to cut domestic taxes?

    Why not?

  18. Gravatar of Benjamin Cole Benjamin Cole
    26. February 2017 at 02:42

    So let’s see..if Trump could just make the US dollar strong again, like it was under Ronald Reagan.

    That is, about 50% of current exchange value….

  19. Gravatar of ssumner ssumner
    26. February 2017 at 05:45

    Jerry, You said:

    “Forty years of trade deficits haven’t led to a weak dollar”

    Deficits don’t affect the exchange rate.

    Bob, That’s wrong, because the dollar would appreciate.

    Negation, The standard assumption is that a tax and equal subsidy has no effect on trade.

    Alex, Good comments.

    Ben, That graph is a nominal exchange rate index. Just saying . . .

  20. Gravatar of Max Max
    26. February 2017 at 06:32

    I’ve always thought that the smart, but politically impossible, policy would be to temporarily raise the gas tax whenever gas prices surge. That’s because at least some of the tax would be paid by producers (some of them unsavory) rather than consumers.

  21. Gravatar of engineer engineer
    26. February 2017 at 06:47

    B. Cole….I don’t want to turn this blog into a agricultural economics blog..but I need to clear up more misconceptions…

    “Scientific American said 40% of corn is used in biofuels.

    The article states the following:
    “Today’s corn crop is mainly used for biofuels (roughly 40 percent of U.S. corn is used for ethanol) and as animal feed (roughly 36 percent of U.S. corn, plus distillers grains left over from ethanol production, is fed to cattle, pigs and chickens).’

    OK the “distillers grains left over” is over 1/3 of the grain by weight and sells for about the same price as corn per weight….so therefore if you got rid of this it would be replaced with a combination of corn and soybeans which would take up more farmland…therefore the net land used for Ethanol is far less.
    I takes that addition logical step, I guess I left that out.

    “Since 2012, corn prices have come down, but it looks like the new floor at about 50% to 100% higher than the old norm.”

    Again, the current price of corn is about 1/3 the average price during the 1970s in real terms. Obviously the price goes up and down with each harvest, so you can cherry pick the data and lets not forget the money illusion.

    “America’s most valuable cropland is corn.”

    No American’s most valuable “grain” cropland is in corn. You can’t grow Oranges in Iowa. A big problem with saying lets get rid of ethanol is the cost and impact to farm policy given the massive overproduction of Midwest US farms. A problem since the 1930s. The government has started to buy up land and return it to the Buffalo and of course it has paid people to keep the land fallow. Any arguments ring hollow with me without a discussion of this problem.

    “But of course, the real reason is not support corn ethanol is that the market does not support it. I prefer, where possible, free markets. ”

    You mean like the $7500 tax credit for your PHEV. When the government is involved it necessary leads to some crazy policies. California has decided that only Sugarcane ethanol can be used for blending in their state. So, Brazil imports a great deal of US corn ethanol, and then turns around and sells Sugar ethanol to California…hmmm yes that must be really good for the planet. Kind of like US wood pellets being sold to European power companies.

    When I ruined a small engine 8 years ago by leaving ethanol in it over the winter…I was very upset with ethanol…but after reading more and educating myself I decided it was not that bad. The energy balance of 2.2 or so is not great….but I think that misses the point. It is also means of converting natural gas, the main fuel uses in the production, to a transportation fuel and it is the cheapest and most environmentally friendly way of boosting the octane in gasoline from 82/83 up to the mandated 87. The price of ethanol per BTU is only slightly more that gasoline, which given its use to increase octane, you would expect in a totally free market. (MIT did an big study that showed you could tune an engine to work on E-85 and greatly increase the efficiency of the ICE because of the higher octane, so BTU/Gallon is only part of the story.)

    The bottom line is that ethanol never would have happened without the government, but I don’t think that there would be a wholesale change in the blending without the mandate at this point. There are pluses and minuses to the environment, so I would say that is mainly a wash. I little bit cleaner air and fewer GHGs in exchange for more nitrogen runoff…

  22. Gravatar of Ray Lopez Ray Lopez
    26. February 2017 at 07:27

    @engineer – you’re as ignorant as Ben. Blind leading the blind? Since I actually know what I’m talking about, since I had (and sold) stock in Dupont (DD), let me educate you: in fact soybeans (which DD does not really cover, they cover maize, one reason I sold them), not corn, is the most valuable crop in the USA, by volume and by value, see here:

    Oh, and I do know farming first hand. At one point I raised 300 CX meat birds a month (cut back, not that profitable) and help raise for pets and food: turkeys, ducks, chickens, and pigs. We don’t eat our Silky show chickens, our Philippine fighting cocks, our rare pet monkeys, numerous farm dogs and cats, or white swans. Now back to our regularly scheduled blog…

  23. Gravatar of engineer engineer
    26. February 2017 at 09:24


    I’m not sure from your response what you have an issue with. Most corn farmers rotate soybeans in every third year to fix nitrogen. Historically soybeans have not been as profitable/acre, but from what I see in this article that may have changed. The bottom line for me is that ethanol production at current levels can easily be done without impacting food production. If anything it has helped stabilize the boom/bust cycle. You can always cut back on the mandate if you had a really bad harvest.

    As far as farming credentials…I was raised in farm country, worked my high school summers putting in hay and helping on a dairy, dated a farmer’s daughter, and got drunk on their homemade hard cider a couple of times. Is that enough for you?

  24. Gravatar of Benjamin Cole Benjamin Cole
    26. February 2017 at 18:30


    Yes, nominal exchange rate. That is my point in some ways.

    So, you are saying (or the Tax Foundation people) saying a border tax will result in a real or nominal exchange rate 25% rise for the US dollar?

  25. Gravatar of Benjamin Cole Benjamin Cole
    26. February 2017 at 18:40


    Well, I prefer free markets but will readily conceded free markets do not capture the cost of pollution. So I embrace pollution taxes.

    Fuel ethanol strikes as a forcible government intrusion into energy markets, to benefit rural interests.

    My point about PHEVs (and batteries are getting better, along with corn yields, which have doubled since the 1970s) is that if we are going to have a national energy policy, maybe we could construct one with real benefits.

    Nukes and PHEVs running on ethanol would mean the end of fossil fuels in the US, and possibly a sensible foreign policy and much cleaner air where people live–in cities.

    It is my pipe dream.

    The corn farmers-ag business, in contrast, enacted their pipe dream.

  26. Gravatar of engineer engineer
    27. February 2017 at 07:30

    Energy production in general has been far from market driven…but nuclear energy must be by far the most subsidized form of energy ever. It is not cost effective even for most existing plants. You have the waste issue, the proliferation issue, and the mining of uranium issues. It made some sense at one time prior to huge natural gas discoveries and the increasing economic viability of renewables. The future of power generation looks to be a combination of renewables and natural gas, baring some storage breakthrough. I could see the future of transportation fuels being either electric or a breakthrough in more affordable GTL or hydrogen. Of course that is barring technological breakthroughs that can happen at any time. I favor the government subsidizing research, perhaps some limited duration tax advantages or other perks, pollution controls, but beyond those the market should choose the lowest cost method. You say ethanol is a big subsidy of rural America, but what is your farm policy? If we really had free trade, the entire world’s corn production would be done in the US midwest, but wouldn’t that be a bit risky. What if there is a drought, a dust bowl? The wind credits are also a huge subsidy for the midwest, do you also oppose them? Someone how decries subsidies and then is in favor of nuclear energy is either disingenuous or misinformed in my opinion. BTW, the US is already independent of OPEC and will be a net exporter of energy within a couple of years, so a “sensible” foreign policy is already enabled. The air in our cities has been getting progressively cleaner for 40 years. Replace diesel and the remaining coal plants with NG and electric and most of the remaining pollution would be cleared. This would be by far the cheapest and quickest route to cleaner cities.

  27. Gravatar of engineer engineer
    27. February 2017 at 10:10

    Here is a good overview of how much money has been wasted on nuclear energy….

  28. Gravatar of Cooper Cooper
    27. February 2017 at 11:30

    A gas tax is a user fee without the creepy big government spying of a congestion fee or cost per mile tax.

    It’s clear that we aren’t raising enough revenue from the gas tax to fund road maintenance. Unfortunately, this one is quite easy to demagogue.

    It’s also obvious to anyone with half a brain that burning fossil fuels is a bad thing from a local air quality standpoint. Even if you think climate change is a Chinese hoax, you still probably don’t want lots of gas guzzlers spewing pollution next to your house.

    So why not kill two birds with one stone and raise the gasoline tax by a dime or two to fix our pothole filled roads and encourage conservation at the same time?

  29. Gravatar of ssumner ssumner
    27. February 2017 at 13:30

    Ben, Nominal exchange rates tell you nothing about whether the dollar is strong.

    Cooper, I’ve always favored a carbon tax, which of course would hit gasoline as well.

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