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Oil and Common Sense

March 09, 1986

The price of gasoline, which not long ago seemed destined to rise inexorably, has been falling precipitously. For those who pump it themselves, unleaded gasoline can be had for under $1 a gallon, while the price of regular has dropped below 90 cents. As world oil prices continue to slide, so will retail fuel prices. Some economists are already forecasting gasoline at 75 cents a gallon by this summer. All this adds up to a windfall for motorists. More to the point, and certainly more urgently, it offers a golden opportunity to Congress to do something simple, substantial and painless about cutting the budget deficit.

Political folklore holds that there is no such thing as a good time to levy new taxes. But common sense makes clear that there are times when taxes can be raised without unduly burdening taxpayers or risking a slowdown in economic growth. Now is one of those times, and an increase in the federal gasoline tax is the method at hand. Congress should move quickly to seize the moment.

How much should gasoline taxes go up? Rep. Anthony C. Beilenson (D-Los Angeles) has sensibly proposed adopting a variable rate, pegged to the fall in oil prices. Under his bill, every $1 decline in the price of a 42-gallon barrel of oil would raise the tax on gasoline by 2.4 cents a gallon.

As a base, the Beilenson bill uses a Jan. 1 oil price of $27 a barrel. A $10-a-barrel decline in that price would produce an added federal tax of 24 cents a gallon. The important thing is that this tax would simply substitute for what had earlier been part of the non-tax portion of retail gasoline prices. Overall, motorists would not pay more than they had become accustomed to paying at the pump. Indeed, even with higher taxes they would pay less than they had to pay just a few years ago, when oil was selling for around $36 a barrel.

At current consumption rates every 1-cent change in the retail price of a gallon of gasoline is worth a little more than $1 billion on an annualized basis. Over the course of a year an excise tax of, say, 24 cents a gallon could produce more than $24 billion in new revenues. Add in taxes equally applied to diesel fuel and gasohol, and billions more could be realized. A Congress that is agonizing over how to cut $40 billion from the budget to satisfy the imperatives of the Gramm-Rudman Act now has the chance to make a great leap more than halfway toward that goal, and without creating economic distortions.

The virtues of a higher gasoline tax are not limited to revenue raising. Imports of oil and petroleum products account for one-third of the $150-billion trade deficit. As oil prices fall, oil imports are bound to grow--first because U.S. production will decline, second because cheaper oil promotes higher gasoline demand. Both of these things, in fact, are already occurring.

The State Board of Equalization reports, for example, that 1985 was the second-biggest year on record for gasoline consumption in California. The 11.739 billion gallons sold last year were exceeded only by the 11.878 billion gallons used in 1978. A major jump in demand came in the last quarter of the year. As gasoline prices become even cheaper, demand is certain to rise.

An increasing percentage of that fuel will have to be bought and paid for overseas. U.S. oil output is falling as lower prices make continued operations from marginal wells uneconomic. About 14% of the nation's total oil output comes from wells that produce 10 barrels a day or less. Below a certain price it doesn't pay operators to keep these so-called stripper wells in production. Shutdowns are already under way. By some estimates, the United States could lose 1 million barrels a day in oil production by the end of this year.

An oil-import fee aimed at propping up prices for the domestic oil industry would create a variety of problems and in any case seems to be firmly opposed by Congress. Inevitably, then, and at least until prices again start to go up, the United States faces having to buy more of its oil overseas, contributing to the trade deficit and increasing the risks that come from excessive dependence on foreign suppliers. An increase in gasoline taxes, besides raising needed revenue, would help limit the growth in that deficit and hold down reliance on foreign suppliers.

Higher gasoline taxes would not be a hardship for consumers. As economist Martin Feldstein has noted, in relation to the costs of other goods a 1986 price of $1.20 a gallon would be roughly equivalent to the 1974 price of 55 cents a gallon. The variable tax approach of the Beilenson measure, which would help keep gasoline demand under reasonable control without raising prices beyond levels that consumers have already found tolerable, is a sound proposal. There may be others that Congress wants to consider, but that consideration had better come quickly. The break in oil prices confers many benefits. The chance to reduce the budget deficit while doing something useful about the trade deficit and the slippage in energy conservation is not the least among them.

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