MONROVIA, Calif.—Drive to the southeast edge of Los Angeles and you’ll hit miles of gleaming car lots, lined up beside the smoggy 210 freeway. These represent the heart of the Southern California car market—which auto dealers say is the most competitive in the world. That makes sense: California has more drivers than any other state, and driving is ingrained in the Golden State’s identity. Californians built the country’s first freeway; they invented drag-racing and the drive-in restaurant.
But as much as Californians drive, they also pay dearly for it: California has some of the highest gasoline prices in the nation. This spring, as gasoline prices shot to a national average of $3.90 a gallon, they went over $5 a gallon in Southern California.
So why would a Southern California car dealer want to raise taxes on gasoline?
That’s exactly what Peter Hoffman, the owner of Sierra Auto, a Chevrolet, Honda, Subaru, and Acura dealership here, wants to do.
“A lot of our industry has been saying, ‘Put a progressively increasing price on gasoline,’ ” says Hoffman, looking out over his Chevy showroom.
At the center of it is a silver Chevy Volt—GM’s flagship electric car, a political football that’s been praised by President Obama as the future of the auto industry and slammed by Mitt Romney as “an idea whose time has not yet come.”
A thoughtful, practical man with carefully combed white hair, wire-rimmed glasses, and a pinstriped suit, Hoffman is far less interested in the politics of the Volt than in what it what it will do for his business’s bottom line. And what Hoffman wants most for that is market certainty—the ability to plan.
Lately, that’s gotten harder—for Hoffman and the entire auto sales industry.
The price of gasoline has a big impact on the decisions people make about the kind of car to buy. Data show that as the price at the pump rises and falls, so follows consumer demand for fuel-efficient cars.
Over the past few years, oil and gasoline prices have become increasingly unpredictable, a pattern economists say will likely continue as oil demand from Asia rises, reserve oil supplies dwindle, and political instability in oil-producing regions continues.
That means the companies that make and sell cars are doing so in a marketplace where consumers’ preferences are constantly changing.
This spring, as gasoline prices climbed to record seasonal highs, almost every customer on Hoffman’s lot came in looking for a fuel-sipper; he couldn’t keep up with the demand for the 42-mpg Chevy Cruze or, despite its $40,000 sticker price, the Volt. Meanwhile, “we couldn’t sell a single truck or SUV,” he recalls. The gas-guzzlers gathered dust on the lot.
As prices fell this summer, the trend reversed; Volt and Cruze sales were down, demand went up for Chevy Suburbans (17 mpg) and Exquinoxes (20 mpg), so that’s what Hoffman ordered. Now, though, after bottoming out in early July, prices are back on the rise, and so are sales of the Volt.
Three months from now?
“Who knows?” he says.
“It’s horrible for automakers, and it’s horrible for us,” says Hoffman.
So Hoffman is one of a growing number of car dealers who advocate the same solution to the problem: raise the gasoline tax, enough to create a consistent, predictable demand for fuel-efficient cars and to force automakers to build gas-sippers that people want and can afford. One way to do this, say automakers, would be to create a new gasoline price floor—a point below which prices won’t fall.
“It allows the population to plan. It allows automakers to plan. It allows us to plan,” Hoffman says.
Hoffman isn’t the only auto dealer pushing this idea.
Michael Jackson, chief executive officer of AutoNation, the world’s biggest auto retailer, is an outspoken gas tax advocate. In April, he told CNBC: “At the end of the day, you would need a gas tax, increased over decades, to keep the consumer focused on conservation.”
Politically, the idea of raising the gasoline tax in a struggling economy is explosive. But a host of economists say that, in fact, raising the 18.4-cent-per-gallon federal gas tax, which has stayed the same since 1993, would actually solve several economic and environmental problems all at once.
“Two of our biggest problems, as an economy, are how much gasoline we consume and how much pollution we produce—our dependence on oil and our contribution to climate change. A gas tax gets at all of these neatly, elegantly, and efficiently,” says James Sallee, an expert on energy and tax policy at the University of Chicago, and a Faculty Research Fellow of the National Bureau of Economic Research. “We know clearly and convincingly that new-car purchases are responsive to price fluctuations. It sends a market signal, instead of having government regulations pick what we do. It causes people to invest in fuel economy at a higher rate.”
The U.S. gasoline tax is one of the lowest in the world. Canada collects $1.20 per gallon, Germany $4.88, and Denmark $5.41. A hefty body of economic research shows that to make a significant difference in the nation’s oil dependence, the federal gasoline tax should be increased to about a dollar.
But even with a more than 500-percent increase from today’s rate, Americans would still pay lower fuel taxes than most of the rest of the developed world. Raise the gas tax, economists say, and you immediately cause a series of market responses to kick in: Consumers, knowing that the price of gasoline will remain consistently high, will aggressively demand fuel-efficient vehicles. Automakers, confronted with consistent market demand, will compete against each other to make the best fuel-efficient cars: not just niche vehicles like the Volt or Nissan Leaf, but cars with widespread appeal—muscle cars and minivans that go just as fast, and haul just as many kids to soccer practice, on less fuel.
Raise the gas tax and American drivers, the theory goes, will be able to take to the road and drive as much as ever, while consuming less oil, spending less money, and producing less pollution.
A host of prominent economists from across the political spectrum, including senior economic advisers to George W. Bush, Mitt Romney, and Barack Obama, know this and agree.
That idea, of course, is tantamount to jumping on a political hand grenade, which is why the politicians these economists advise haven’t tried to do it.
Higher gasoline taxes will take a big bite out of drivers’ pocketbooks, hurting consumers already struggling in a weak economy.
The solution there could be a tax trade-off: raise the tax on gasoline but make an equivalent cut on payroll or income taxes. In Washington, quiet conversations have started about moving such a policy through Congress. But so far, lawmakers, fearful of getting attacked by political opponents for supporting an energy tax, have been deeply wary of openly backing the idea, especially in an election year.
And ultimately, that’s the problem, sighs Hoffman. “It’s an easy answer—except for politically.”
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