Stimulus Not Enough to Jump Start Car Sales

On February 17, President Obama signed a controversial and massive $787 billion economic stimulus package into law, and hailed the action as a stepping stone towards turning the economy around, as it will lower taxes, incentivize home buying and, according to the Administration, create or save millions of jobs.

Another key part of the stimulus revolves around the automotive industry: anyone who buys a new vehicle in 2009 will be allowed to deduct the sales tax paid on the vehicle from their taxable income.  In a typical scenario laid out by USA Today (see the previous link), an “average” car purchase would reduce an individual’s taxable income by roughly $700 according to a tax estimator.

Not exactly a ton, but in today’s economy, every little bit helps, right?  Well, apparently it does, just not enough to spur car buying.

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Give Me Alternative Energy, Just Don’t Make Me Pay For It!

It’s becoming more and more apparent that we need to find viable alternative energy sources.  Whether it’s for economic reasons – not having to send hundreds of billions of dollars to unstable countries – or environmental reasons – not dumping billions of tons of carbon dioxide into the atmosphere – the time has come to kick our oil addiction and move towards clean, renewable alternative energies.

But, how are we going to pay for this research and transition, and who’s going to foot the bill?

One of the most commonly kicked around ideas is to raise the federal fuel tax from 18.4 cents to something a little more substantial.  After all, this would be an easy way to help wean people off gasoline and at the same time help fund billions of dollars for alternative fuel research.

(Click here to read about my plan to raise the fuel tax to 50 cents.)

Unfortunately, I wouldn’t count on this rational idea coming to fruition any time soon, because whenever the phrase “tax increase” is uttered, people tend to lose their minds and politicians tend to lose their jobs.

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It’s Time to Raise the Federal Fuel Tax

Over the last several months, there has been a lot of talk regarding what the Federal government should do to help ease the sting of high gas prices.

The discussions have ranged from creating a gas tax “holiday” where the federal fuel tax would be suspended during the busy summer travel months, to cutting oil shipments to strategic oil reserves – which actually was recently implemented.

While much of the dialogue has revolved around helping to ease the short term pain caused by rising gas prices, most of the “solutions” that have been kicked around Capitol Hill don’t help to solve the long term problems created by the ever persistent energy – specifically, oil and gasoline – crisis.

So, instead of just chastising our legislators and their inability to deliver a viable solution to our current problems, I’ve come up with a simple plan that will cause only minimal short term pain, but in the end will help to create a long term solution:

  1. Raise the federal fuel tax from 18.4 cents per gallon to 50 cents per gallon.
  2. Impose a $2,500 sales tax on all vehicles sold that do not average at least 28 mpg.

Based on a price of roughly $4 per gallon, the current federal fuel tax accounts for 4.6 percent of the total price of a gallon of fuel. By raising the federal fuel tax to just 50 cents per gallon, the tax would still only account for 11.4 percent of the total price of a gallon of gasoline.

That’s still well under what most citizens of Western European countries pay, who, in some cases face nearly 20 percent fuel taxes. These high fuel taxes are a large reason why fuel consumption has either flat-lined or decreased in most European nations over the past two decades.

Now, I’ll be the first to admit, I’d rather keep my own money than hand it over as tax revenue. I’m sure you’re the same way. However, that’s the point of the matter. It’ll hurt to lose that money. Therefore, I’m willing to bet you’ll probably find ways to drive less.

That means the tax is doing its job!

In addition to helping us curb our fuel usage, the increased fuel tax would be a tremendous revenue boost for the Federal government. Americans currently consume just under 400 million gallons of gasoline each day, so by increasing the federal fuel tax 31.6 cents per gallon, the government would raise an extra $50 billion per year.

Just think what could be done with that extra $50 billion in tax revenue. What if half of that was explicitly earmarked for alternative and sustainable fuel/energy research? It seems to me that we’d find a solution to the problem a lot faster than our current snail’s pace.

The remainder of the tax revenue could then be earmarked for improving public transportation – like expanding and better subsidizing local subway (urban) and bus systems (both urban and non-urban).

This is a fair tax because it is essentially a pay as you use tax; the more fuel you use the more taxes you pay.

Along the same lines, the $2,500 tax for vehicles designated as “gas guzzlers” would also be a fair tax (after all, you choose what you drive), despite the fact that it’s in essence a double-whammy. First, you pay the tax for simply purchasing the fuel inefficient vehicle, and then over the vehicle’s lifetime you pay more in fuel consumption taxes simply because you’re probably going to be using more fuel.

To make the gas guzzler tax a little more fair, it would be implemented in some sort of step process. That way, if your car comes close to meeting the 28 mpg standard – let’s say you buy a car that averages 25 mpg – you’re not penalized the same as someone who buys a vehicle that gets single digit fuel economy.

Again, I know nobody likes to hear the phrase “raising taxes” but in the end, I believe this will be the cure for what ails us. As we adapt to the higher prices we will make the necessary changes required of us to become more energy efficient. We’ll drive less, buy cars with better fuel economy. And, the byproduct of our short-term pain at the pump will be improved public transportation and alternative, sustainable and cleaner sources of energy.

I think we can all live with that.

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