Taxes, spending: that gaseous feeling

We had expected to render some sort of preliminary verdict on the actions of the state legislature this week, but the lawmakers are taking a little longer than expected to reach a decision on taxing and spending plans for the coming fiscal year before they adjourn. And that's OK. We're encouraged that rather than taking a shotgun, raise taxes approach to come up with whatever revenue seems needed to fund the array of state programs we now have to pay for, lawmakers are at least considering the notion that average Vermonters are just about taxed out. Of course, let's remember than some of the stronger-than-expected tax returns currently brightening the revenue picture may well prove to be one-offs, as affluent Vermonters seek to minimize their exposure to capital gains taxes. And let's also remember that the coming healthcare overhaul will require some financial sacrifice at some point - so despite Mr. Shumlin's pleasant sounding pronouncements about no new broad-based taxes, there will be a need for more tax money next year for the new system coming into view.

Rather than raise spending and taxes, the approach should be all about how to limit both, and begin to take a long term view of bringing the way the state delivers certain services - and education is chief among them - into a 21st century reality. The legislature came up with a few tentative but potentially useful ideas on reining in the costs of education, such as lowering the threshold whereby a school district places itself in the penalty zone when its spending rises too far above a statewide norm. Much more is needed than that, of course. What we need is a full-blown, comprehensive approach. It should be one of the top issues on the gubernatorial campaign trail next year. Our expectation is that it will still get mired down in outdated rhetoric around the myth of local control.

Meanwhile, speaking of taxes, let's look at the one measure that's already locked in - the widely unpopular, but in our view unfortunately necessary, gasoline and diesel tax.

As many already know, this tax hike became necessary because ironically, fuel conservation measures have worked too well. People are driving more fuel efficient vehicles, and consuming less gasoline, at least here in Vermont. Globally, that may be another story, and more on that in a minute. Maintaining roads and bridges is essential, and for the short run, the nearly 6 cent increase in the tax on gas, plus a 2 cent increase in tax on diesel fuel, was about the only way to go, unless forgoing some $60 million in matching federal highway funds was somehow considered responsible (It isn't). Clearly though, it isn't going to work to go to this well year after year. Another way will have to be found - along with using transportation money for transportation purposes - to keep roads and bridges maintained.

But this question suggests a thought about the larger, bigger picture around the entire future of fossil fuels as the basis for transportation. Two recent articles in The Economist news magazine point to a worrisome picture around carbon emissions and fossil fuels - much of which comes from burning coal but a fair share from using oil-based gas and diesel fuels - which will demand, we think, more attention than they have gotten in the past five years or so, before the economic downturn shifted the focus away from worrying about environmental issues and over towards more purely economic ones.

The first, in last week's issue, noted that the market value of companies involved in extraction of oil, gas and coal depended to a great extent on the recoverable reserves each given company could lay claim to. If company X has known reserves under its control of so many billions of barrels of oil, for example, that makes its market valuation superior to company Y, which may have fewer. And energy companies have every incentive to keep investing large sums of money into expanding the size of their known reserves, to drive their stock price and valuation higher.

The problem is that the world passed a certain milestone earlier this year - the subject of an article in this week's issue of The Economist, as well as in the New York Times - that the level of parts per million of carbon in the atmosphere is rapidly approaching 400. That's well north of Bill McKibben's now well-known tipping point of 350, as the point beyond which climate change becomes locked in. Even for those who find it easy to resist blessing every one of McKibben's pronouncements as received truth, it's a troubling development. That there is a link between carbon emissions and an increase in global temperatures is an argument that has been convincingly made. An increase of 2 degrees Celsius is about what the world's climate can probably handle, most experts who've studied the question seem to think. Beyond that lies a host of unpredictables, and none of them sound good. Existing, proven reserves already contain more carbon than we as a world can burn or use if keeping world temperatures from rising more than those 2 degrees Celsius is a priority, which it should be. If you want to put it in economic terms, as The Economist does, we're already over budget.

So how are we going to use all those reserves that haven't been found or exploited yet? The answer is we can't, without imperiling the climate, and the stability, of the world as we know it. There's been a lot of head-in-the-sand thinking going on about this, but the inconvenient truth needs to be confronted, and much sooner than anyone wants to. And more conservatively oriented economists need to start grappling with it.

Which takes us back to higher fuel taxes in Vermont. In another irony, or inconvenient truth - an increase in gas taxes will mean that people will find even more ways to economize and use less fuel, further depressing tax revenues from this source. Yet in the end, the only way to curb the appetite for oil and gas, and push the search for alternatives is to tax it so high something else takes its place, like electric cars, for example. That's not much comfort to the average working person in the world right now who depends on a car to commute to work. And it won't mean much if Americans crimp their driving habits so everyone in emerging economies like India and China, to say nothing of South Korea and Indonesia, think it's now their turn now to consume gas as we have historically done. If so, we're heading for a collision of the first order.


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