Fueling Change

Dean David M. Schizer unveils an innovative tax proposal that would help curb America’s destructive dependence on gasoline

By Laura Saunders

Winter 2009

National security, climate change, urban sprawl: Each is a serious issue by itself, but Law School Dean David M. Schizer and his colleague Thomas W. Merrill of Yale Law School see a common thread uniting them, and it is Americans’ addiction to gasoline. “Our dependence on gasoline is casting a shadow on our national future,” warns Dean Schizer.

At the Law School’s most recent Charles E. Gerber Transactional Studies Program tax conference, Merrill and Schizer proposed a gasoline tax taking aim at all three issues. In a novel approach, their levy would take effect only when gas prices are low and would refund all revenues collected directly to U.S. taxpayers in a way that rewards individual conservation. The proposal is designed to be politically feasible and to change a maximum of undesirable behavior with a minimum of government interference. “I’ve never seen a gas tax I didn’t like,” notes Louis Kaplow of Harvard Law School. “And the benefits from this one would be huge.”

Few would disagree that something needs to be done, especially to address climate change and national security. American motorists account for 6 percent of the world’s carbon dioxide emissions, an amount exceeded only by the entire national output of CO2 emissions from China and the European Union. Carbon dioxide is a major contributor to global warming, and there is no known way to reduce its effects except by using less gasoline or switching to a less-polluting energy source. Cars and trucks also emit carbon monoxide, hydrocarbons, and particulates that endanger health and the environment in other ways.

The relation of gasoline to U.S. national security is just as worrying. Much has changed since the end of World War II, when America was largely self-sufficient in energy. Today, more than two-thirds of U.S. petroleum products are imported, often from nations that are unstable, unsavory, or potentially hostile—including Venezuela, Nigeria, Iraq, Angola, Algeria, and Saudi Arabia. A single year’s oil imports from Venezuela and Nigeria (more than 780 million barrels combined), in fact, is greater than the total in the U.S. strategic petroleum reserve (689 million barrels).

Merrill and Schizer’s proposal goes after these ills, plus what they term the “vicious cycle” of urban sprawl, in which decreasing density has led to ever farther-flung suburbs with larger, energy-gobbling houses requiring yet more driving. Although the professors hope their measure will promote several types of conservation, Merrill cautions that it should not be viewed as a total solution to U.S. energy problems. “But we think it is a good one,” he says, “and we don’t want the ideal to be the enemy of the possible.”

Here is how their plan would work: At the time the law is enacted, tax writers would set a threshold about 10 percent below the then-price of gasoline. So if gas costs $2.25 per gallon when the law is passed, lawmakers could make a set point of perhaps $2.00. Going forward, taxpayers would know that gasoline might cost more than $2.00 per gallon but would never again cost less.

If gas prices rise to more than $2.00 a gallon, the tax would not be imposed at all—so as not to burden U.S. consumers further. Instead, it would kick in only when the price falls below the designated threshold. The actual rate of the tax imposed would vary in order to maintain the price at the set point. So if the price fell to $1.75 per gallon, then the tax would be 25 cents, bringing it up to $2.00. All revenue would go into a special fund.

At the end of each year, the total amount of money in the fund would be divided by the number of adults over 18 in the U.S. Each adult would then receive a check for the quotient—in this scenario, perhaps $1,000.

The result: Taxpayers who drive an average amount would realize no net benefit or loss from the Merrill-Schizer tax. For them, the $1,000 check would be about equal to the amount they paid in gasoline tax for the year. But those who conserve gasoline in whatever way—driving less or not at all, using a fuel-efficient car, or finding an alternate fuel—would wind up with extra dollars in their pockets because their consumption would be less than the average. And those who consume more gasoline would feel a pinch, because their refund would not fully offset the cost of the tax they paid. Over time, then, the tax would reward frugal gas-users and put pressure on those who are profligate. The latter might then change their behavior; at the very least, they would be more aware of their outsized use of a scarce and nonrenewable resource.

It is easy to see why conferees praised Merrill and Schizer’s proposal as “elegant.” Because of the profound opposition energy tax proposals have traditionally aroused, the professors have taken great care to make this one politically palatable. The levy would be invisible when enacted—because the threshold is below the price of gas—and disappear when prices are high, greatly reducing the temptation to repeal it. By refunding all revenue, their plan is not open to the charge that it is just another revenue-grab by tax-hungry politicians. They also ensured that administration would be relatively simple, piggy-backing on the existing system.

The tax’s design also promotes conservation in a way that allows market forces to determine the response to it. Should communities be denser, or cars altered, or fuels different? Under this proposal, the market decides, not policymakers who might be shortsighted or subject to political influence. (Merrill points out that the steep gasoline taxes long in effect in Europe and Japan actually encouraged carmakers to be innovative, which in turn gave them an advantage over their American competitors.) At the same time, the measure would send an unmistakable message to oil-producing nations that the U.S. is serious about not being beholden to them in the future. 

The proposal’s chief drawback, as always, is a historic American resistance to any oil conservation measures. Conferee and Columbia Law School professor-to-be Michael J. Graetz remembers well the demise of Bill Clinton’s BTU tax proposal in 1993, shortly after Graetz was a senior Treasury official. “The American public views the automobile as its freedom machine and will resist any large tax on gas,” he says. Residents of areas who travel long distances by car often assert that gas taxes are grossly unfair, especially if they live in oil-producing areas like Texas or Wyoming. Other opposition might come from those worried about the tax’s effect on the poor, who often cannot afford newer cars or well-located housing.

Merrill and Schizer counter that slight variations of their idea could cope with such issues—varying the tax according to region, for instance, or weighting the refund according to income level. The proposal’s flexibility is yet another of its virtues. Given the new administration and the urgent need for change, perhaps this plan will fare better than its forebears. “It is due,” says Dean Schizer, “and overdue.”


Laura Saunders is a New York–based freelance journalist who has written extensively on tax issues for Forbes.

Illustration by David Plunkert