Want A Politically Viable Gas Tax? Make It Voluntary

Like Greg Mankiw, I think it’s a no-brainer that we should raise the gas tax. But it’s incredibly difficult to muster the political will to impose a traditional tax. (Witness California’s inability to increase the state gas tax by a measly 12 cents.)

Last year, Robert Samuelson (and a host of others) proposed a contingent tax that only kicks in when the price of oil drops — say, below $4 a gallon. I’m concerned that contingent taxes of this kind would just give OPEC an incentive to keep the price of oil just above the kick-in price. (Thomas Merrill and David Schizer have a detailed analysis of how the tax could work, why it wouldn’t enrich OPEC, and how the revenues could be rebated to the public to keep the tax revenue neutral.)

Proponents of a price floor originally hoped that the plan would be more palatable because it was basically a “tax more tomorrow” idea. But the idea was a lot more appealing before the recent drop in pricing — because now voters would see an immediate increase in their pump price. To be sure, after the fact you’re promised to get a lump-sum rebate (which, crucially, is not tied to individual consumption). But future (speculative?) payments are likely to loom small in the public consciousness.

Barry Nalebuff and I have just published in Forbes
a different way to make a gas tax more appealing. We suggest that the federal government whip up patriotic support for “independence bonds” that would pay you a lump sum of cash today if you agree to pay the government in the future an extra tax for every gallon of gas that you use:

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 19 m.p.g. would be charged $5.26 each 100 miles, while a Prius rated at 46 m.p.g. would be charged $2.17 per 100 miles.

For cars with average fuel efficiency (22.4 m.p.g.), 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.

Readers of this blog will recognize this idea as another commitment contract (see also here and here) that people can opt in to to improve their incentives to reduce gas consumption. Indeed, people could enter into something very close to these commitments on my beloved stickK.com. I can imagine a day where an enterprising referee offers to give cash up front if car owners will promise to pay the referee for every mile driven (or possibly every mile driven above some pre-specified amount) in the coming year.

You’d be wrong, however, if you inferred that we came to this idea because of our work with commitment contracts. Instead, we dreamed it up by applying the “flipping tool.”

Barry Nalebuff and I love flipping ideas. In our book Why Not? we give dozens of examples of how existing ideas can be made better by flipping things around. For example, it would be easier to peel bananas if we flipped them around. If you look closely at this picture, an expert in banana peeling shows you how it should be done:


The flipping tool is how we came to the idea of a voluntary tax. Usually there are multiple dimensions of an existing idea that can be flipped. Consider these:

1) What’s the opposite of a rebate or refund?

It’s a “pre-bate” or “pre-fund.” Instead of giving taxpayers back the money after the fact, it makes a lot more sense from a behavioral perspective (and just a downright trust perspective) for the government to give them the money before the fact of the tax.

2) What’s the opposite of a war bond?

It’s an independence bond. As we wrote in Forbes:

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.”

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.

With war bonds, people paid the government money up front and were paid money from the government after the fact. Our independence bond flips the order of the cash flows.

3) What’s the opposite of G.M. offering to buy down the price of your gas if you pay them more for a new car today?

It’s lowering the price of buying a car, if you’ll agree to pay more for gas in the future. As we noted in Forbes:

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 G.M. 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.

4) And finally, what’s the opposite of a mandatory tax?

Of course, for me, it’s a voluntary tax. Unlike death, a gas tax for conservation purposes doesn’t need to be unavoidable.

Bob Schilling

As a student of government, the administration issues for some of these ideas make my knees weak. That said, we could probably get through them. On gas tax, I think it's easier to raise it 2-3 cents a year for several years in a row to ease the pain of a sudden jump. Taxing people as they drive would probably work best with some kind of GPS device on the car -- you might make that a requirement for the credit and sell it through car dealers.


I think it is very naive to think OPEC has the kind of fine touch that can keep oil prices stable just above a certain level.

The past year has emphatically demonstrated it cannot do much at all about price.


Interesting idea, but it's going to get a lot of populist resentment when rich people who live in cities and own cars but rarely drive them get paid $400-plus per car per year.


"Taxing people as they drive would probably work best with some kind of GPS device on the car - you might make that a requirement for the credit and sell it through car dealers."

So much for limited government...


"measly 12 cents" = 26%


An interesting idea, but I don't see how it could be effective. Anyone who calculated this to be a net cost would clearly opt out, saving no gas. It just so happens these people would also be the biggest consumers of gas. I suspect this "tax" would actually lower the government's revenue by providing a subsidy to people who already drive fuel efficient cars few miles every year. However, since I am one of those people, bring it on. :)


Major adverse selection problem.

Joe G

I have a hard time with implementing and administering taxes of this sort. Do we really need to have to set up another bureaucracy for the monitoring, compliance, and payment of "travel" taxes? Not to mention the HUGE potential for invasion of privacy that tracking literally EVERYONE in their cars 24 hours a day.

It seems to be that there is some way to structure an "elastic" tax in such a way that it keep the revenue stream from travel constant despite the decline in the usage of fuel. Some way to base the tax both on a single unit of the fuel (per gallon) and price.

Have a base amount per gallon and then a variable amount that increases based on the price per gallon. As the price per gallon rises (and consumption declines) the tax rises to keep the over all revenue from fuel relatively constant.


Why don't the other 17 states have "federally" required annual inspections?


Why not reflip it and make it a nudge by simply raising the gas tax and sending out stimulus checks but allowing people to purchase - by rejecting the stimulus check- a full rebate of the gas tax they pay every year?

tom fiore

" I don't mind paying taxes, they buy me civilization "
- Oliver Wendell Holmes


Your assessment of California's inability is incorrect. You imply that there wasn't the political will to do it.

However, the state legislature fell just one vote short (out of 120 legislators) in passing the budget compromise that would have raised the gas tax by 12 cents.

Moreover, California has an idiotic 2/3 voting requirement to pass the budget and tax increases.

Significant majorities in both houses of the California Legislature favored increasing the gas tax.



You're right. People who think they will pay more will opt out. People who will pay less will opt-in. What's left out your analysis is the people who may or may not save money.

With a 11,000 mile break even, there are a lot of people just above and just below who would change their behavior to save some money. If the taxpayer wins the government loses some tax revenue but accrues all the savings from reduced gas purchases and mile driven.

I think this plan is more about changing behavior than actually solving transportation funding.


I have an idea. It's called a Freedom Tax. I get to buy things at market prices with low and flat tax rates, and in exchange the government doesn't put a tracking device on my car and let's me live my life.


I'll pay an extra $4/gal if the government buys me a scooter.

Dan G

"Have a base amount per gallon and then a variable amount that increases based on the price per gallon. As the price per gallon rises (and consumption declines) the tax rises to keep the over all revenue from fuel relatively constant." - Joe G

So, when demand declines due to rising fuel prices, your plan increases the variable tax on fuel, which further spurs the increase in prices and the drop in demand. Repeat ad infinitum.

If your only goal is to attain energy independence, you've got the right idea. In terms of promoting steady tax revenue, you would have to balance the (in)elasticity of demand with the rate of variable tax based upon price. I doubt that the federal government could (or willingly would) balance this in a way that was efficient.


There seem to be all sorts of loopholes. What about people who own many cars? Will they get $500 per car? Or could they just register one car but drive another?

I think it ought to be a percentage tax, something like a 100% sales tax on gas. Thus, if gas would cost $2/gallon, a motorist would have to pay $4.

This would give OPEC and others more of an incentive to keep prices low. Since increases in oil prices would now cause an even larger decrease in US demand for oil, they would have to be concerned that if oil prices got too high, the US would move to alternative fuels sooner.

I'd imagine that even with a 100% tax, the actual average price at the pump wouldn't be a whole lot higher (say, +50%?), but less revenue would be going to OPEC and oil companies and more would be going to the US government.


Alaska presently has a gas tax. Palin, whom everybody on the planet has derided for being vacuous, has done something pretty brilliant up here. She has instituted a heavy tax on gas that she is using to prop up the state's pension funds for state workers and teachers. This was unpopular for the short term but it has been accepted and it will be a revenue source that she will "switch" out of when higher gas prices return.
We make our bones on oil revenue. So Palin implemented a policy that would breach our temporary shortfall with this tax.
I thought you folks should know about this.



The solution is higher taxes on cars with MPG under a certain threshold. You have different gas nozzle sizes like was done back in the day for unleaded and leaded.

Want to guzzle gas? Fine. You pay a premium.


This plan has the same problems that gun-buyback programs and cash-for-clunkers have. It provides an economic incentive to keep old cars around and not drive them much.