That troublesome supply and demand rule


As gas prices edge back up toward the highs that followed Hurricane Katrina, the chorus of North Carolina citizens calling for a repeal of the state’s motor fuel tax has begun to sing a familiar tune.

Editorials, blogs and news outlets have all fixed on the tax, one of the highest in the nation, as the scourge responsible for our economic woes. What’s more, opponents add, much of the money earned through the tax doesn’t even fund the highway improvement projects earmarked for these government riches.

While we’re usually sympathetic to concerns over pork barrel spending or misappropriation, the debate about motor fuels taxes ignores the proverbial elephant in the corner. Gas prices are rising not because the commodity is taxed so heavily but primarily because supply is running out. And, as we all learned in high school economics, when supply decreases in relation to demand, prices go up.

In North Carolina, the gas tax is determined at a rate of 17.5 cents per gallon plus 7 percent of the wholesale costs. That results in higher gas taxes every time crude oil prices spike. It is, unfortunately, a system that exacerbates price-per-barrel fluctuations. But just because our system is flawed doesn’t mean gas taxes should be written off as a useful policy tool.

Analyst Philip Verleger, an MIT credentialed economist who has advised several presidents, advocates gas taxes as the key to promoting a reasonable energy agenda. Market growth in India and China has created prosperity in those populous nations and sent skyrocketing demand for a limited resource. Debating the gas tax in North Carolina is not going to change the global trends ultimately responsible for rising fuel prices.

Verleger advocates high taxes as a way to decrease demand through increased efficiency in our vehicles ‘— like Europeans have demanded ‘— and conservation. In addition, the government can leverage threatened tax hikes against suppliers to drive down wholesale prices. Money generated through the tax can be invested in a program to buy back gas-guzzlers that get fewer than 25 miles per gallon.

Americans adjusting to such a system would indeed feel some growing pains. The economy will lag until we can improve public transportation and city planning to accommodate fuel conservation. The long-term benefits include price stability (because wholesale price increases would have a smaller impact on the overall cost of gas), decreased dependence on foreign oil and a cleaner environment.

Even President Bush has ‘fessed up to oil addiction, and one would hope that organizations like the John Locke Foundation which clamor for decreased taxes could also own up to North Carolina citizens about the true reasons for their pain at the pump. It is, after all, more than an economic question. As we in the Triad continue to struggle with Environmental Protection Agency standards for air pollution, the least we can demand from our politicians and media is a little bit of fresh air.