By Edward Zelinsky
A federal value-added tax (VAT) is today’s magic bullet for slaying the federal budget deficit. A federal VAT would be a veritable cash cow, obviating the need for painful measures like serious spending reductions and middle class income tax hikes. A VAT would be more regressive and complex than its proponents acknowledge. Like most putative panaceas, a VAT should be rejected.
VATs are national sales taxes, widely used in Europe. Unlike a conventional retail sales tax, a VAT requires that, at each stage of production, manufacturers add to the cost of goods (and services) a tax reflecting the value added at that stage. The cumulative VAT payments paid as a product is made become part of the final price paid by the purchaser when he buys the finished product.
Among the influential proponents of a VAT is former Federal Reserve Chairman Paul Volcker. Some observers assert that President Obama’s National Commission on Fiscal Responsibility and Reform is designed to provide Mr. Obama with the political cover to propose a VAT after this year’s mid-term elections. This perception was reinforced by Mr. Obama when he said he is open to all budgetary “options,” including a VAT. Among the other prominent passengers on the VAT bandwagon is former President Bill Clinton.
Many who advocate a VAT are sincerely concerned about federal deficits and believe that tax increases in the form of a federal VAT must be the solution. However, the case for a federal VAT is unconvincing.
We don’t need another layer of taxation in our federal tax system. However, a VAT, placed on top of existing federal taxes, would be just that, adding to the complexity and regressivity of the federal tax system.
Some VAT proponents tout it as a means of simplifying the federal tax system. A portion of VAT revenues, they argue, can be used to remove more, perhaps most, Americans from the burden of paying the federal income tax.
These claims should be met with skepticism. Even if a portion of VAT revenues are initially used to relieve some taxpayers’ federal income liabilities, for the long term, a VAT would likely be added on top of federal income taxes for individuals and corporations.
Taxes should be transparent, making clear to voters the price of government so that they can assess the benefits of public activities against such activities’ costs. A VAT, in contrast, is largely hidden since it is embedded in the prices of the goods and services consumers buy.
VAT proponents retort that, when a customer purchases a product or service, the amount of tax built into the price will be disclosed. It is, however, unlikely that such disclosure will in practice prove meaningful.
While VATs made sense in the European context after World War II, the European model of public finance looks less attractive today with Greece, Portugal and Spain teetering on the edge of national bankruptcy.
Moreover, a VAT would fit uncomfortably into the existing structure of U.S. public finance. A national VAT would compete with and eventually crowd out the retail sales taxes which are central to the fiscal autonomy of the states. We value the financial independence of the states in a way that Europeans do not prize the autonomy of their provinces.
VAT proponents contend that a VAT, as a tax on consumption, will incent Americans to save more by increasing the cost of consumption. However, most federal taxpayers are already encouraged to save on a tax-advantaged
Deborah Gordon is a senior transportation policy analyst who has worked with the National Commission on Energy Policy, the Chinese government and many other organizations. Daniel 
Sperling is Professor of Engineering and Environmental Science and Founding Director of the Institute of Transportation Studies at UC Davis. Gordon and Sperling are the authors of Two Billion Cars: Driving Towards Sustainability which provides a concise history of America’s Love affair with cars and an overview of the global oil and auto industries. In the original article below they look at what Washington needs to do to support sustainability.
Washington policymakers may have been backed into a costly corner on the Detroit bail out, but the real measure of their mettle is whether they can help us innovate our way out of this debacle. Automaking must undergo fundamental transformational change. The country needs a roadmap. That’s where Congress and the new Administration come in.
Over 20 years of government inaction does not instill confidence, however. Glorying in cheap oil, ignoring mounting imports, avoiding climate action, and preciously protecting U.S. automakers gave birth to Hummers while promising battery technology grew up overseas in Japan, Korea, and, increasingly, China. Few auto advances have been made. And now we’re poised to lose those gains as the venture capitial driven electric-vehicle companies that sprang up in recent years close shop.
One sure fix out of the utter mess we’re in would be to seriously raise gasoline taxes. This would change the entire oil equation, promoting sustained vehicle and fuel innovations the likes of which America has never seen. But with today’s economy bloodied and raw, this appears decidedly off the table, at least for now.
Instead, with current gasoline prices at all time lows, a minuscule 58 cents-a-gallon in 1980 dollars, the U.S. will remain hooked on oil. Priorities to accelerate the commercialization of clean advanced vehicles could be further derailed by Congress as it orders up the next fuel du jour. Corn ethanol, for example, a clear energy and climate fiasco, has long been the recipient of massive public subsidies amounting to about $10 billion in 2008. Federal commitments to clean vehicle and energy R&D, on the other hand, have dwindled to nearly nothing.
Over and over, the public interest has been swamped by regional and special interests and the private desires of consumers. This trend needs to be turned around: innovation needs to serve the public good.
California has figured out how to do this. And when it comes to cars, they have been pushing the envelope for half a century. It is now time for Washington to stop resisting a winning strategy and follow suit.
Adopting new clean vehicle performance standards is the key. The government must resist the temptation to pick winning technologies. Instead, we need innovative performance goals that let automakers and consumers decide which clean cars to commercialize. California’s 1960s pollution laws brought us the first automotive emission control, positive crankcase ventilation. Zero-emission vehicle regulations of the 1990s gave birth to the Prius. Just imagine what vehicle innovations new federal standards could summon.
The single most effective near-term action Washington can take to accelerate the development and adoption of next-generation clean vehicle technologies – electric vehicles, plug-in hybrids, and fuel cell vehicles – with no direct cost to consumers, is to create new performance standards for near-zero emission vehicles. Each company would be required to produce a set number of near-zero emission vehicles based on their market share, with more credit given to highly efficient vehicles with longer driving ranges that are mass marketed. Such regulations focus the minds of automakers and their suppliers. Small innovative start-up companies also get into the game. New supply chains for low-carbon cars would sprout up in America. Green jobs would be created.
It’s not too late for Washington, and Detroit, to follow the leaders and reimagine our automaking future. The European Union is already pursuing a near-zero emission vehicle category with less than 50 grams of carbon dioxide pollution for each kilometer traveled (equivalent to 113 mpg for gasoline).
So, while large gas taxes are still a sensible long-term solution, Washington must give automakers clear marching orders now. Our policymakers may be risk adverse when it comes to taxation, but Congress is an accomplished regulator.
The auto bail out, volatile oil prices, conflicts in the Middle East, increasing fears of climate change, and intense competition are creating the perfect storm for transformational auto innovation. Washington must take the reins and steer entrepreneurs, engineers, and the public down the path to reinvent vehicles.
Louisiana Enacts the Most Comprehensive Advanced Biofuel Legislation in the Nation Governor Bobby Jindal has signed into law the Advanced Biofuel Industry Development Initiative, the most comprehensive and far-reaching state legislation in the nation enacted to develop a statewide advanced biofuel industry. Louisiana is the first state to enact alternative transportation fuel legislation that includes a variable blending pump pilot program and a hydrous ethanol pilot program. Field-to-Pump Strategy The legislature found that the proper development of an advanced biofuel industry in Louisiana requires implementation of the following comprehensive “field-to-pump” strategy developed by Renergie, Inc.: (1) Feedstock Other Than Corn (a) derived solely from Louisiana harvested crops; (b) capable of an annual yield of at least 600 gallons of ethanol per acre; (c) requiring no more than one-half of the water required to grow corn; (d) tolerant to high temperature and waterlogging; (e) resistant to drought and saline-alkaline soils; (f) capable of being grown in marginal soils, ranging from heavy clay to light sand; (g) requiring no more than one-third of the nitrogen required to grow corn, thereby reducing the risk of contamination of the waters of the state; and (h) requiring no more than one-half of the energy necessary to convert corn into ethanol. (2) Decentralized Network of Small Advanced Biofuel Manufacturing Facilities Smaller is better. The distributed nature of a small advanced biofuel manufacturing facility network reduces feedstock supply risk, does not burden local water supplies and provides for broader based economic development. Each advanced biofuel manufacturing facility operating in Louisiana will produce no less than 5 million gallons of advanced biofuel per year and no more than 15 million gallons of advanced biofuel per year. (3) Market Expansion Advanced biofuel supply and demand shall be expanded beyond the 10% blend market by blending fuel-grade anhydrous ethanol with gasoline at the gas station pump. Variable blending pumps, directly installed and operated at local gas stations by a qualified small advanced biofuel manufacturing facility, shall offer the consumer a less expensive substitute for unleaded gasoline in the form of E10, E20, E30 and E85. Pilot Programs (1) Advanced Biofuel Variable Blending Pumps - The blending of fuels with advanced biofuel percentages between 10 percent and 85 percent will be permitted on a trial basis until January 1, 2012. During this period the Louisiana Department of Agriculture and Forestry Division of Weights & Measures will monitor the equipment used to dispense the ethanol blends to ascertain that the equipment is suitable and capable of producing an accurate measurement. (2) Hydrous Ethanol - The use of hydrous ethanol blends of E10, E20, E30 and E85 in motor vehicles specifically selected for test purposes will be permitted on a trial basis until January 1, 2012. During this period the Louisiana Department of Agriculture and Forestry Division of Weights & Measures will monitor the performance of the motor vehicles. The hydrous blends will be tested for blend optimization with respect to fuel consumption and engine emissions. Preliminary tests conducted in Europe have proven that the use of hydrous ethanol, which eliminates the need for the hydrous-to-anhydrous dehydration processing step, results in an energy savings of between ten percent and forty-five percent during processing, a four percent product volume increase, higher mileage per gallon, a cleaner engine interior, and a reduction in greenhouse gas emissions. Act No. 382, entitled “The Advanced Biofuel Industry Development Initiative,” was co-authored by 27 members of the Legislature. The original bill was drafted by Renergie, Inc. Representative Jonathan W. Perry (R - District 47), with the support of Senator Nick Gautreaux (D - District 26), was the primary author of the bill. Reflecting on the signing of Act No. 382 into law, Brian J. Donovan, CEO of Renergie, Inc. said, “I am pleased that the legislature and governor of the great State of Louisiana have chosen to lead the nation in moving ethanol beyond being just a blending component in gasoline to a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline. The two pilot programs, providing for an advanced biofuel variable blending pump trial and a hydrous ethanol trial, established by the State of Louisiana should be adopted by each and every state in our country.” State Agencies Must Purchase or Lease Vehicles That Use Alternative Fuels Louisiana’s Advanced Biofuel Industry Development Initiative further states, “The commissioner of administration shall not purchase or lease any motor vehicle for use by any state agency unless that vehicle is capable of and equipped for using an alternative fuel that results in lower emissions of oxides of nitrogen, volatile organic compounds, carbon monoxide, or particulates or any combination thereof that meet or exceed federal Clean Air Act standards.” Advanced Biofuel Price Preference for State Agencies Louisiana’s Advanced Biofuel Industry Development Initiative provides that a governmental body, state educational institution, or instrumentality of the state that performs essential governmental functions on a statewide or local basis is entitled to purchase E20, E30 or E85 advanced biofuel at a price equal to fifteen percent (15%) less per gallon than the price of unleaded gasoline for use in any motor vehicle. Economic Benefits The development of an advanced biofuel industry will help rebuild the local and regional economies devastated as a result of hurricanes Katrina and Rita by providing: (1) increased value to the feedstock crops which will benefit local farmers and provide more revenue to the local community; (2) increased investments in plants and equipment which will stimulate the local economy by providing construction jobs initially and the chance for full-time employment after the plant is completed; (3) secondary employment as associated industries develop due to plant co-products becoming available at a competitive price; and (4) increased local and state revenues collected from plant operations will stimulate local and state tax revenues and provide funds for improvements to the community and to the region. “Representative Perry and Senator Gautreaux have worked tirelessly to craft comprehensive advanced biofuel legislation which will maximize rural development, benefit consumers, farmers and gas station owners while also protecting the environment and reducing the burden on local water supplies,” said Donovan. “Representative Perry, Senator Gautreaux, and Dr. Strain, Commissioner of the Louisiana Department of Agriculture and Forestry, should be praised for their leadership on this issue.” About Renergie Renergie was formed by Ms. Meaghan M. Donovan on March 22, 2006 for the purpose of raising capital to develop, construct, own and operate a network of ten ethanol plants in the parishes of the State of Louisiana which were devastated by hurricanes Katrina and Rita. Each ethanol plant will have a production capacity of five million gallons per year (5 MGY) of fuel-grade ethanol. Renergie’s “field-to-pump” strategy is to produce non-corn ethanol locally and directly market non-corn ethanol locally. On February 26, 2008, Renergie was one of 8 recipients, selected from 139 grant applicants, to share $12.5 million from the Florida Department of Environmental Protection’s Renewable Energy Technologies Grants Program. Renergie received $1,500,483 (partial funding) in grant money to design and build Florida’s first ethanol plant capable of producing fuel-grade ethanol solely from sweet sorghum juice. On April 2, 2008, Enterprise Florida, Inc., the state’s economic development organization, selected Renergie as one of Florida’s most innovative technology companies in the alternative energy sector. By blending fuel-grade ethanol with gasoline at the gas station pump, Renergie will offer the consumer a fuel that is more economical, cleaner, renewable, and more efficient than unleaded gasoline. Moreover, the Renergie project will mark the first time that Louisiana farmers will share in the profits realized from the sale of value-added products made from their crops. Please feel free to visit Renergie’s weblog (www.renergie.wordpress.com) for more information.
Should California consider a fee on corn fuel ethanol use?
* * Lower price for food, gas, water, beer, cleaner air and funds for the budget from oil profit.
[...] and set tough emissions and efficiency standards rather than trying to pick winning technologies, argue Dan Sperling and Deborah Gordon in a post on the Oxford University Press blog. Sperling and Gordon are the authors of a new book published by OUP, “Two Billion [...]
How about less cars period. It would be nice to see more light rail and trains in American cities. Cars are very expensive as the main source of commuting too and from work. Trains are better for this in general.
Also, how about making cities a lot more walkable. Portland Oregon is a walkable city. So is Manhattan. I love walking around Manhattan. I also like walking around Santa Cruz California.
The cost alone in ill health is staggering. People sit in cars all day long and can barely get out of their car to go to the store. The mindset of urban sprawl and a three car family needs to change.
Americans spend too much time inside cars. There are a lot of other options.
I have a car, but I mainly use it to get groceries and laundry. Not much else. There is an overemphasis on the car as the be all and end all of American transportation.
Personally, I hope they expand Zipcars, car rentals by the hour so there are less cars on the road.
There is some magical thinking going on with electric cars and biofuels. The environmental cost is too high for electric cars and biofuels.
Americans may not want to hear it, but trains need to be a bigger part of the equation. So do walkable cities.
[...] More: Time for Washington to Lead : OUPblog… [...]
[...] with cars and an overview of the global oil and auto industries. A few weeks ago we posted an original article by these authors. Today we have pulled an excerpt from the book which looks specifically at [...]