I-912 Taxes Reality

The Seattle Times published an interesting article today regarding the relative increase in gas prices in the last twenty years as compared to milk prices in the same period.

Since the early 1980s, milk prices have gone up about as much as gas prices — more than 80 percent in both cases, according to the latest available federal Bureau of Labor Statistics (BLS) figures, which run through June. What's more, grocery prices overall have risen more than gas prices over the past two decades.

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But as much as we pay for gas, we pay a lot more for groceries — typically the other big weekly purchase. According to the Food Marketing Institute, households spend an average of $92.50 a week on groceries, and more if they have kids. By contrast, the average household spent $25.63 on gas and motor oil in 2003, the latest year for which federal Consumer Expenditure Survey data are available.

In fact, according to the BLS, keepers of the Consumer Price Index, long-term grocery inflation exceeds gas inflation — 89.4 percent versus 84.6 percent over the past two decades.

Yet, although food is pretty darn important, and something none of us can live without, we so easily forget that over time, gas isn't the only thing that keeps going up in price.

The photo to the left is one I took on my recent trip to France. I kept passing by this one gas station that had what I kept thinking were gas prices I-912 proponents dream for. While the gas station was indeed operational and pumping gas at prices greater than advertized, and while gas for free would be great for our wallets, it would also be a complete disaster given oil is a natural resource we know the world will soon run out of. I'm sure all my Republican readers would agree.

Europeans are of course paying far more than we do for gas, entirely because of the fact they are taxed so much for it. In this country we haven't come to grips with the need to tax gas. We also have a messed up view of what gas prices should be based on the fact that for the longest time prices remained mostly static.

The Seattle Times article explains:

Just looking short-term, though, can give a distorted picture.

Based on the Consumer Price Index data, after the second big oil shock in 1979-80 and the subsequent collapse in energy prices, gasoline prices generally stayed flat or even fell for most of the next two decades. As recently as February 2002, people paid about as much for gas as they did in February 1982.

That long period of near-stability likely created a "reference price" for gas in people's minds. An important concept in behavioral economics, the reference price is the idea we carry around in our heads of what something ought to cost. A Baby Boomer might think a Milky Way bar should cost no more than a nickel, while a Gen-Y'er won't blink at paying 50 cents or more.

When prices suddenly rise above our reference price, SMU's Shu said, we tend to assume they're unfair. That plays into another pattern identified by behavioral economists: People feel losses, such as gas-price increases, much more keenly than they do gains.

"When we see gas prices go down we think 'Oh, good — they're back where they should be,' " Shu said. "But when they go up, if there's not a cause we can immediately pinpoint in our mind, we think it's unfair."

Opponents of the small gas tax increase that went into effect this summer (3 cents this year, 3 next year, 2.5 cents in 2007 and 1 cent in 2008), are victims of much the same problem. Back in 1969, we used to pay 37% in tax of the total price of a gallon of gas. Before this current increase we were only paying about one third of that, depending on the price of gas, at about 12%. The new taxes hardly move things back to the levels of 36 years ago. However, because we've seen little increase in the tax since the early 1990's, having a bump that gets us from 28 cents per gallon to 37 cents comes as a bit of a shock.

Yet, that shock is tempered by the fact the tax will increase is small increments over the next four years, not all at once, as I-912 proponents would have you think. They claim this is a "huge" tax increase. Yet when the price of gas jumps in one week, due to the soaring price of oil or other market forces, as much as the gas tax will add in four years, you have to wonder how much behavioral economics can be used to explain people's negative reactions to a gas tax that will fund our future transportation infrastructure. (nwphtt60)