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Why Not?: A Voluntary Gas Tax—A Commentary by Ian Ayres ’86 and Barry Nalebuff

The following commentary was published in Forbes on March 16, 2009.

Why Not?: A Voluntary Gas Tax
By Ian Ayres ’86 and Barry Nalebuff

Voluntary taxation seems like an oxymoron. No sane person would ever volunteer to be subjected to a tax. Yet about half the cost of World War II was financed by voluntary purchases of war bonds, which had a sort of tax built in because they paid below-market returns. Buying them was the patriotic thing to do. Bond rallies with stars like Rita Hayworth and Bette Davis generated mass support for "the greatest investment on earth."

The Obama Administration could use something like this to help win our nation's struggle for energy independence. An "independence bond" would pay you a lump sum of cash today if you opted to pay the government in the future an extra tax for every gallon of gas that you used. Of course, those who end up driving their cars less will end up making money from the deal. But that's the point--to reduce our dependence on foreign oil.

Economists embrace the conservation benefits of raising the gasoline tax to reduce our oil consumption. Gas taxes also save lives as highway fatalities decrease with less driving. But neither political party is going anywhere near a traditional gas tax. Independence bonds are different because they make it clear that a gas tax can be revenue neutral, especially since those who sign up get paid in advance. And it's hard for even the staunchest libertarian tax critic to be against giving people the option of being taxed for the good of the country.

Here's the recipe: The government would offer a $500 advance tax rebate each year for every car you choose to sign up for the tax. In return, you would commit to pay an extra $1 for each gallon of gas you buy. The actual tax paid would be based on miles driven and fuel economy. Thus a Chevy Impala rated at 19mpg would be charged $5.26 each 100 miles, while a Prius rated at 46mpg would be charged $2.17 per 100 miles.

For cars with average fuel efficiency (22.4mpg), you'd break even if you drove 11,200 miles a year. People who already drive their cars less or who drive fuel-efficient cars would be particularly likely to opt for the independence bonds. But even these folks would have a strong economic incentive to reduce their driving. (Since most people can't or won't cut their consumption by 50%, it might be better to pay $250 up front and then charge people only an extra $1 per gallon for their use above 250 gallons. That would cut down on the cost of the program while still providing all the right incentives.)

Because the plan is optional, high-mileage drivers and businesses that can't afford the extra cost would be unlikely to sign up. But the history of war bonds suggests that, if marketed properly, independence bonds might be appealing to a large swath of Americans. Cars that were committed to conservation would also be eligible to display decals showing their patriotism in the fight for energy independence. The decals might also authorize use of highway lanes now reserved for buses and car-poolers.

People who claimed the rebate would need to have their odometers checked once a year to calculate the amount of tax owed. It's fairly hard to roll back an electronic odometer. Odometer readings would be particularly easy in the 33 states that have federally required periodic vehicle inspections.

In the spring of 2008 Chrysler promised to subsidize the price of gas to $2.99 a gallon for a year for anyone who bought one of its cars. Back in 2006 Hummer and GM promised that you wouldn't pay more than $1.99 a gallon for a year. These promotions tapped into the same demand for lower gas prices that fueled Hillary Clinton's and John McCain's proposals for a summer gas-tax holiday. The problem with all these plans is that they subsidized people to drive more.

Conservation bonds are just the reverse: Participants are paid today for accepting higher gas prices in the future. A company like Toyota might even offer to match the government offer: Prius owners could get a $1,000 rebate if they promise to pay Toyota an extra 2.2 cents for every mile driven. While car companies might use conservation rebates to attract green customers, a call by our leaders to voluntarily embrace credible conservation would engage an even larger number of Americans.

Some people would opt for conservation bonds out of patriotism. Others would do it to publicly commit themselves to using less fuel. But many people will be driven by the lure of the immediate $500 tax rebate. Here's one time where impatience, environmentalism and economic stimulus all go hand in hand.

Ian Ayres and Barry Nalebuff are professors at Yale Law School and Yale School of Management. Ayres’­ latest book, Super Crunchers, was published in August.