April 2003

Volume 12, Number 4

Perspective: A "Freedom Tax" on Gasoline

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Whether or not Iraq’s mammoth oil reserves have anything to do with our war to oust Saddam Hussein, our dependence on foreign oil is indisputably bad for this country. We spend over $100 billion annually on petroleum imports, accounting for roughly 20% of our balance-of-trade deficit (2002). The entire U.S. economy shudders whenever temporary supply shortages cause price spikes. And our nation’s disproportionate consumption of oil (with 4.6% of the world population, we consume 25.6% of the world’s petroleum) causes resentment around the world—all the more so because we stand almost alone in our unwillingness to shoulder some of the responsibility for dealing with global climate change. Indeed, our disproportionate energy use may be part of the underlying hatred toward Americans that fueled the terrorist attacks of 9/11—perhaps financed, ironically, by our payments for Middle Eastern oil.

To reduce our consumption of oil, our nation should immediately institute a “Freedom Tax” on gasoline of $1.00 per gallon. Added to the 18.4¢ per gallon we currently pay in federal excise tax for gasoline, this Freedom Tax would spur demand for fuel-efficient vehicles, would eliminate some nonessential driving, would increase use of public transit and carpools for commuting, and—by reducing demand for petroleum—might actually help limit long-term gasoline price increases. While such a tax would dramatically increase our cost of gasoline, we would still pay less than drivers in Europe and Canada.

This dollar-per-gallon Freedom Tax would raise approximately $100 billion per year. Rather than simply flowing into the treasury, this new tax revenue should be used to reduce taxes elsewhere. For example, it could pay for an income tax credit to offset Social Security taxes at the lower end of the wage scale—those people least able to afford the increase in gasoline costs. In other words, this would be a revenue-neutral tax—an idea referred to as tax shifting. By using this new Freedom Tax to reduce income taxes, the net economic burdens would be minimized—though, clearly, those burdens would be significant for some.

With gasoline prices at near-record highs across the country, one would hardly think this is the time for a major new tax on petroleum consumption. But there has never been a clearer connection between our consumption of petroleum and direct security risks to our country. Just as our nation united behind rationing and recycling during World War II, I believe that if this program were effectively presented by our leaders in Washington, our nation would unite behind a Freedom Tax on gasoline.

– Alex Wilson

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April 1, 2003