MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

YOU DECIDE: Is tax and rebate the path to energy independence?

By Dr. Mike Walden
North Carolina Cooperative Extension Service

Gas prices are down, and there's no doubt this is good news for the economy. With less being spent at the pump, consumers have more to spend at malls, shopping centers and outlets. Whereas just a couple of months ago the prospects were dim for the Christmas shopping season, those forecasts have now turned bright in light of cheaper gas.

Yet there's a downside to lower-priced gas. Every time gas prices drop at the pump, it weakens our collective incentive to use energy alternatives or to purchase more fuel- efficient vehicles. Gas at $2 a gallon rather than $3 makes buying a hybrid car or using ethanol or other alternative fuels less appealing in just plain dollars and cents.

Now some of you may be thinking, “Hey, $2 gas is just temporary. It will zoom back to $3, or higher, in no time.” You might be right. But you may also be wrong. Some very well respected economists predict that within a few years the world will be swimming in a glut of oil, and this will push oil and gas prices even lower than they are now.

One thing is for sure: Oil and gas prices can be volatile, going through wild swings of ups and downs. Not only does this make it difficult for consumers deciding on what kind of vehicle (small and fuel efficient or large and gas-consuming) to purchase, but it presents big obstacles for investors in vehicle and energy alternatives.

For example, an auto company may find a hybrid profitable to manufacture when gas is $3 a gallon, but a money loser when gas is at $2. Likewise, a biofuels factory may make a profit when gas costs $3 but may go out of business when the pump price is $2.

This is why some economists and writers have proposed that we need to keep gas prices at some lofty level — $3 or higher — so that both consumers and producers are financially motivated to pursue energy alternatives and energy efficiency. This could be achieved with a floating gas tax. Whenever gas prices fell below the target level — say $3 — the gas tax would rise to bring the price back to $3. Likewise, the extra tax could be removed if prices moved above $3.

Now, before you begin throwing darts at my name, realize there is a second part to this plan. Rather than the government keeping the extra gas tax revenue, the funds would immediately be rebated back to taxpayers. That's right, drivers would pay more gas taxes, but the government would return the money!

“Why, that's the silliest thing I've ever heard. How would that help us in our goal of energy independence?" I know many of you are thinking this, because this is exactly what my wife said when she read the previous paragraph!

Let me explain. Higher gas prices certainly would motivate drivers to use less gas and use more gas alternatives. But higher gas prices would also make drivers poorer. If the government returned the gas tax revenues to drivers, drivers wouldn't be poorer. But — and here's the crucial point — drivers would treat the rebate as income. They would spend some of the rebate on gas, but most would be spent on other things.

The net result of the tax and rebate plan is that gas consumption would drop, drivers would be motivated to look for non-gas alternatives, but drivers would not be financially worse-off from the higher gas tax.

Polls show that Americans overwhelmingly support a national goal of energy independence. Cheaper gas actually works against this goal. A tax and rebate plan is a way to move toward energy alternatives without impoverishing drivers. You decide if my wife was right when she finally said, “It may take a while to realize it, but economists can make sense!”

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Dr. Mike Walden is a William Neal Reynolds Professor and extension
economist in the Department of Agricultural and Resource Economics of North
Carolina State University's College of Agriculture and Life Sciences. He
teaches and writes on personal finance, economic outlook and public policy.
His You Decide column is provided every two weeks by the Department of
Communication Services. Earlier You Decide columns are available on the Web
at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm
Related audio files are at
http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html