Origins of the Gasoline Tax (Part II of “Political Capitalism: Understanding the Beast that Broke the Cage”)

“I see no force in modern society which can cope with the power of capital handled by talent, and I cannot doubt that the greatest force will control the other forces.”

– William Graham Sumner. “Economics and Politics” [1905]. In Earth-Hunger and Other Essays. 1913. Edited by Albert Galloway Keller. Reprint. New Brunswick, NJ: Transaction, 1980, p. 329.

“It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference.”

      – Ludwig von Mises, Human Action (4th Edition), p. 337.

Jim Rogers (Duke Energy), Aubrey McClendon (Chesapeake Energy), John Rowe (Exelon), T. Boone Pickens, Matt Simmons…  The list goes on of the political capitalists (aka “rent seekers”) who, in the tradition of Ken Lay and Enron, are politicizing the energy market for momentary advantage–but all in the name of saving the planet.

Try to name some counterweights, some prominent free-market capitalists.  I can think of one in the energy sector who does not want the publicity (Charles Koch, Koch Industries) and one in banking (John Allison, BB&T). Any others of note (please add a comment if so)? They are few and far between.

Rent-seeking political capitalists are hardly new. The New Deal featured a variety of business leaders wanting special government favors at the expense of taxpayers, consumers, and/or competitors. And in the decades before FDR’s power grab, leading voices from the public utility industries championed entry-and-rate regulation by government, fearing market “raiders” more than mandated rate maximums (this story comes later in the series).

Energy Favors

The history of the U.S. energy industry is replete with examples of government intervention originating within the industry. As documented in Oil, Gas, and Government: The U.S. Experience (1996), there is government intervention sponsored by “Big Oil” and many more instances of intervention stemming from “little oil”–or nonintegrated independents who were particularly vulnerable to shifts in the marketplace.

Mom-and-pops with good political connections or working through trade associations could and did wield the political ax against bigger competitors and/or unorganized consumers, I found in my study.

One of the most interesting examples of the industry at political work concerns the first state motor fuel tax, passed in Oregon in 1919 at, you guessed it, $0.01 cents per gallon.

Was this tax the work of a far sighted reformer? Or was it a confluence of private and public interests creating a demand for and supply of government favor?  It was the latter.

Specifically, “Big Oil” was behind the Oregon gas tax. The major oil companies via their trade association calculated that the demand for gasoline and thus the price of gasoline would rise more from tax-financed new road construction than demand for the same would fall from the tax.

Oregon’s beginning led to road taxes in all 48 states within a decade to fund road construction.

Problem was that gas tax revenue started to be diverted to other uses to the chagrin of the American Petroleum Institute (API). “Phantom roads” became an issue. Government intervention giveth and taketh away.

Here is the story of the first motor fuel tax reproduced from Oil, Gas, and Government (pp. 1375–76).

Politics at Work: “Big Oil” and Motor-Fuel Taxes

Events in Oregon were the genesis of the motor-fuel tax revolution. The state legislature, desperate to secure new funding for public roads, proposed in 1917 to increase motor vehicle fees. The rationale was that any increase would be saved in automobile repairs once improved roads were in service. Leading the fight with the author of the plan, C. C. Chapman, was I. N. Day, a former state senator turned paving contractor. After a long fight, the legislature approved the tax bill thanks to Chapman’s oft-revised roadmap. As he explained:

The political problem involved was chiefly that of map making…. I was asked to draw a state highway map that would win the votes of a majority of the members by placing roads [so] they could take them home with them as pork wrested from Portland…. This map ran in front of the farm homes of enough legislators that . . . 37 representatives joined in introduction of the bill…. It took all day . . . to get the map changed so a majority of the Senate would vote for the bill…. My poor map was almost unrecognizable, but it served its purpose.

With the motor-vehicle tax, the motor-fuel levy was only a step away. Earlier, a gas tax had been proposed in conjunction with the state gasoline inspection law, and with more revenue needed, Chapman, now editor of a leading newspaper, editorialized for a gas tax, which was seized upon by road interests and legislators. A bill was drafted by the highway committee, and a 1 cent per gallon levy became law on February 25, 1919, with the help of regular editorials by Chapman. Years later, Chapman expressed his thanks before the American Petroleum Institute (API):

In passing, may I pay a deserved tribute of credit to the big oil companies. They cooperated with us every session in the application of the gasoline tax idea. We had reports that they were opposing it in some other states, but in Oregon at no time did they attempt to obstruct it. Their counsel aided in perfecting details of the legislation.