Governments have two types of tools at their disposal with which to moderate the supply and demand of energy: (a) taxes, and (b) standards and regulations. Standards and regulations will be considered in the context of energy and environment (see: “Fuel Efficiency Standards”). This section will discuss two types of taxes: the gas tax and the windfallAn unexpected, unearned or sudden gain or advantage tax.

Gas Tax

A gas tax is a surcharge levied on every unit of gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. sold, the proceeds from which go to local and/or national governments. As long as demand for energy is relatively inelastic in the short-run, a fuel tax will provide a stable stream of revenue for the state. Over time, fuel taxes create incentives for people to decrease their energy consumption.¹

Many have criticized the United States, the world’s leading consumer of gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States., for not effectively using fuel taxes to promote energy conservation. The federal gas tax in the U.S. has remained at 18.4 cents per gallon since 1994. This is supplemented by state and local taxes averaging 31 cents per gallon, bringing the overall nationwide average tax on gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. to 47.7 cents.²

Gas Tax Burden by U.S. State, May 2011

Source: http://www.api.org/statistics/fueltaxes/

When compared with much higher taxes in Japan and Europe, where a gallon of petrol or dieselA denser, less refined form of oil that is widely used to fuel trucks, airplanes, and other industrial-strength machines. can cost as much as $5-6, it becomes clear that the U.S. tax is not designed to bring about any structural changes in American demand.³  Some argue the federal tax should be raised to at least 50 cents per gallon and perhaps as high as $1 per gallon. But U.S. political leaders have been reluctant to take the unpopular step of increasing the price of gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States..

WindfallAn unexpected, unearned or sudden gain or advantage Tax

WindfallAn unexpected, unearned or sudden gain or advantage taxes are special taxes a government imposes when it deems the profits made by an industry to be excessive. Such profits often result from a “financial windfallAn unexpected, unearned or sudden gain or advantage” such as a spike in oil prices. The U.S. government levied a windfallAn unexpected, unearned or sudden gain or advantage tax against oil companies in 1980 following the Arab oil embargo, and talks of another round of windfallAn unexpected, unearned or sudden gain or advantage taxes were revived during congressional hearings

in November 2005, but failed to be enacted. ⁴ Obama campaigned to enact a new windfallAn unexpected, unearned or sudden gain or advantage tax on excessive oil profits during his campaign, but his administration decided against it in 2008.

Source: http://www.factsonfuel.org/gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States./index.html (as of summer 2008)

While windfallAn unexpected, unearned or sudden gain or advantage taxes can be a boon to government treasuries and give the impression of an active government response to high oil prices, most observers believe such actions are ultimately detrimental to the nation’s energy securityA complex concept meaning many things, energy security is most often used in a narrow sense to indicate the stability of a country’s supply of energy.. These taxes mostly serve to curb investment, raise prices, and:

distort long-term incentives. Worse, they purport to be able to distinguish between a healthy level of profits and an ‘excessive’ one—something specialist antitrust authorities, not greedy governments, are best placed to judge.⁵

So far, there has been no legislative follow up to the hearings.

1 “Fuel Taxation – International Experience”

2 API “Motor Fuel Taxes.”

3 The European Union has not yet settled on a harmonized fuel tax, so each member country still sets its own tax rates. According to the EU’s energy organization, the average tax  for a liter of gasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. as of June 2009 was approximately: $1.41 in France, $1.21 in Germany, and $1.30 in Great Britain. The highest gas prices in the world, as of November 2008, were in the Eritrea ($9.58/gallon); Hong Kong($7.39/gallon); and Turkey ($7.08/gallon). The lowest prices during this same period were in Venezuela ($0.08/gallon); Iran ($.38/gallon); and Libya ($0.53/gallon).

4 Bamburger

5 Organizing for America “New Energy for America.”

6 “Oily Slope”

Further Reading:

Kiviat, Barbara. “Is It Time to Raise the Gas Tax? – The Curious Capitalist – TIME.com.” The Curious Capitalist – Commentary on the Economy, the Markets, and Business – TIME.com. 9 June 2010. Web. <http://curiouscapitalist.blogs.time.com/2010/06/09/is-it-time-to-raise-the-gas-tax/>.

Lugar, Richard G. “Richard G. Lugar – Raise the Gax Tax, End Our Oil Addiction.” The Washington Post: National, World & D.C. Area News and Headlines – The Washington Post. 1 Feb. 2009. Web. <http://www.washingtonpost.com/wp-dyn/content/article/2009/01/30/AR2009013002728.html>.

Kevin Bonsor and Ed Grabianowski, “How Gas Prices Work – Across the Country, Across the World,” HowStuffWorks, http://money.howstuffworks.com/gas-price1.htm. 

Learn More

For more information on the topic of oil, choose from the links below:

- International Oil Markets and the Global Economy

- High Oil Prices, Reversing Globalization?

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