Carter Considers a Gas Tax

Despite some tough consequences, a promise of benefits at home and abroad

One of the most discouraging aspects of the Iranian crisis is how little it has moved the U.S. Government to counter the energy threat by taking dramatic action to conserve oil. Not only does the trauma in Tehran threaten at any moment to choke off deliveries of nearly 3 million bbl. of crude per day to an oil-thirsty world, but it increasingly jeopardizes petroleum supplies throughout the Middle East. U.S. Government officials calculate that a widespread upheaval in the Persian Gulf could quickly cut U.S. imports by 4 million bbl. per day, or more than 22% of total consumption. On another front, the 13-nation OPEC cartel, which has raised petroleum prices by some 1,600% since 1970, is preparing to lift prices yet again when it meets next week in Caracas. Meanwhile Congress continues to dither and quibble over President Carter's five-month-old energy package.

But there was a small glimmer of hope in Washington last week. Showing welcome signs of moving more directly and forcefully to curb energy use, the White House was considering a high federal excise tax on gasoline, perhaps as much as 50-c- per gal.

Gasoline consumption is the root cause of the nation's petro-woes, and any move to curtail it substantially would have broad and deep economic consequences. Though rising prices and the slowing economy have cut gasoline use by 4.7% this year, the fuel still accounts for just under 40% of the 18 million bbl. of oil that the U.S. burns each day. The Administration estimates that an immediate 50-c- boost in the cost of gasoline, which now sells at an average for all grades of $1.04 per gal., would cut consumption by 7%, the equivalent of about 500,000 bbl. of crude per day.

Though advocates of continued price controls often dispute the point, evidence proves that rising gasoline prices reduce consumption. Studies by Economist Alan Greenspan and others show that when prices go up 10%, gas sales from 1.5% to 2% per licensed driver. Argues Greenspan, "It is clear that a very large part of the driving public consciously or unconsciously is quite sensitive to price."

A cut in consumption of the size that would result from a 50-c- per gal. tax would pay important dividends both domestically and internationally. In the U.S. it would amount to an immediate and forceful warning to all Americans that energy conservation is now a national imperative. Overseas it would help loosen the world market for petroleum, make it at least somewhat more difficult for OPEC to raise prices, reduce prices on the spot market and send a signal to the U.S.'s increasingly skeptical allies that the nation is exercising leadership to curb energy use. Even with a 50-c- tax, Americans would still have a comparatively easy ride; most Europeans, Japanese and other non-Americans pay $2 or more for the fuel.

A big gasoline tax would be about the nation's strongest weapon, short of rationing. Under a timid law passed in October, rationing cannot be imposed until either Congress approves it or the President is able to declare that the nation faces an immediate threat of a 20% oil-supply shortfall. By that time waiting lines at service stations probably would reach to the horizon. Even then, Congress could overrule the President and block rationing.

Last week the Administration disclosed the details of its proposed emergency rationing plan. Each registered vehicle would be limited to a fixed number of gallons per week, and any driver who did not use his quota could sell his ration coupons on a "white market" for whatever the traffic would bear. Congress rejected a similar scheme last May, and adoption of almost any rationing plan is not expected before next autumn--unless Middle East oil is cut off.

Compounding the sense of drift, Energy Secretary Charles Duncan made public a confusing state-by-state conservation plan that calls for holding 1980 gasoline consumption to about 7 million bbl. per day, just about where economists expect it to be anyway. In an embarrassingly typical DOE bungle, the targets set for New York, New Jersey and Connecticut during the first three months of next year would allow drivers in those states to increase their auto usage.

Almost in desperation, the White House for the past month has been examining a consumption-cutting tax on gasoline. In late October, an Administration task force headed by Deputy Energy Secretary John Sawhill began looking at what the U.S. could do in event of a major supply interruption. From a list of 28 options, the task force came down to two: rationing or a gasoline tax.

In November, Carter instructed Budget Boss James McIntyre to draw up a detailed plan for a tax that might work. McIntyre's proposal was sent for consideration and amendment last week to the White House's economic policy group, which includes Treasury Secretary G. William Miller, Vice President Walter Mondale, Chief Economic Adviser Charles Schultze, Domestic Adviser Stuart Eizenstat and McIntyre.

The five-man group favored a high tax but could not agree on the particulars. So each member sent a separate proposal to Carter. The differences revolve around the size and timing of the tax and how to distribute the projected $50 billion in revenues that it would collect. One popular idea is to rebate perhaps $40 billion to workers and employers in the form of lowered Social Security and income tax levies. Another suggestion involves using some $10 billion to help balance the fiscal 1981 federal budget.

Any tax proposal would face tough, almost insurmountable opposition in Congress, which considers a new tax as a pox in an election year. Typical of what special-interest groups will tell their Congressmen is the observation of a Southern California Auto Club spokesman: "The tax is just a scam to increase Government revenues and the federal bureaucracy at the expense of good-hearted people across the country."

Even as Carter was telling 100 Congressmen at a White House buffet dinner last week that the idea of a stiff gasoline tax "is looking better and better," legislators were beginning to snipe at the idea. Said powerful Democratic Congressman Charles Vanik of Ohio: "Are you crazy? Fifty cents is out of the ballpark!"

Whether by taxation or rationing, cutting back on gasoline would jolt an economy in which the jobs of one worker in seven somehow spin around the automotive industry. Millions of Americans not only build, sell and service cars but also supply the tires, windows and other parts, construct highways, drive trucks or otherwise deliver the goods.

Sales of cars would slide still farther. The biggest vehicles, which produce the fattest profits for manufacturers and dealers, would be the worst hurt. Small cars would increase their market share, which now is more than 50%. Among Detroit's Big Three, ailing Chrysler Corp. would fare the worst. Though 70% of its cars are compacts and downsized models, vs. 50% of Ford's and 30% of GM's, small vehicles are the least profitable, and the company would have to boost output sharply to remain competitive. That would be a difficult step for Chrysler to take. Not only is it experiencing bottlenecks but the company also would have trouble borrowing money to expand production.

Other automakers would be better off. The conversion to small models would bring forth a prolonged spurt in capital investment by the manufacturers and their suppliers for tools, dies, entire new plants. Eventually sales would surge because drivers would feel an increasing need to switch to gas-saving cars. As demand rose, particularly for the most economical vehicles, prices would ride up. Concludes Detroit Auto Analyst Arvid Jouppi: "We are awfully close to the $10,000 small car."

More immediately, large segments of the nation would suffer from the decline in driving and in demand for cars. The old manufacturing centers of the Midwest and East--steelmaking Pittsburgh and Youngstown, tiremaking Akron, glassmaking Toledo, many others--rise or decline along with the fortunes of autos. St. Louis, Kansas City, Wilmington, Del., and dozens more cities are automaking centers. In the Far West (where public transit is grossly inadequate) and the Plains states (where communities are separated by long distances), people must drive or suffer immobility. Of course, they can and must do more car pooling. That is difficult for many: the suburbanite who works the night shift, the construction laborer who moves from site to site, the marginal farmer who drives to a supplemental job in town. But food production would not be set back; to run their equipment, farmers long ago shifted largely from gasoline to diesel fuel, and they are almost certain to be exempted from any tax increases or tight rationing.

Fast food chains such as McDonald's, Wendy's and Howard Johnson's would suffer. Restaurants near population centers would surge. So would air travel, as people flew on vacation instead of driving. That would boost sales of more fuel-efficient jets, and Boeing, Lockheed, McDonnell Douglas and other planemakers would benefit. But resorts in South Florida and New York's Catskills would be hit hard because most people go there by car. Roadside motels would suffer, but rents of apartments and values of houses close to city centers and public transit would climb.

In the event that gasoline prices were to increase sharply, growth in the economy as a whole would not necessarily slow, or unemployment rise, if the proceeds of the tax were recycled to consumers, as the various Administration proposals recommend. But the impact on consumer prices would be severe. A full 2.4 points of the nation's current 13.1% inflation rate is traceable directly to increases in gasoline prices this year. Tacking another 50-c- a gal. onto fuel costs by most estimates would add three or four points more to the consumer price index next year.

Though nobody likes rationing or higher taxes, the economy is destined to suffer even worse reverses if Congress fails to act. OPEC's prices are all but certain to keep climbing in 1980, draining wealth out of the U.S. economy and into the bank accounts of foreign oil exporters. The price rise will help slow the consumption of gasoline still further, of course, but the inflationary impact will quickly spread throughout the whole economy, since crude oil price increases affect not just automotive fuel but all petroleum products. Enacting a gasoline tax would not only slow consumption while providing less inflationary pain, but would also soften the impact on the economy of future cartel price increases because less foreign oil would be entering the U.S.

For too long Americans have blithely assumed that rivers of cheap energy would flow through that economy like a magic elixir in endless abundance. But as 1979 has vividly demonstrated, the nation takes extreme risks if it does not curb its addiction to demon crude.

For the long term, it is vital to move forward rapidly to develop every alternative energy source, from coal and shale to wind, waves and the sun. Meanwhile, conservation of existing supplies is indispensable, and politicians would do well to face the issue. Concludes Milton Lipton, president of the leading petroleum advisory firm of Walter J. Levy Consultants: "Despite the inevitable inequities of either steep taxes or rationing, there comes a time when you have to say, 'Damn the torpedoes and full speed ahead.' I cannot think of a better time to ask the American people to accept either of those measures than during the current Iranian crisis. The political opportunity may never be better."

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