How to boost fuel efficiency? Raise taxes, executives say

While politically unpalatable, gasoline that costs at least $4 a gallon would have a far greater effect on American fuel usage than Washington's $25 billion loan program meant to spark investment in new technologies, executives told the Reuters Auto Summit in Detroit.

Consumer demand for fuel-efficient cars like Toyota Motor Corp's Prius and Ford Motor Co's Escape hybrid surged last summer as gasoline prices soared above $4 a gallon.

But with the pressure off -- the average U.S. retail gas price was $2.66 a gallon at the end of October, according to the benchmark Lundberg survey -- Americans are once again buying fuel-hungry sport utility vehicles and other large cars.

"The U.S. allows the price of gasoline to go back and forth across this line where the consumers don't care about fuel efficiency and where consumers do care about fuel efficiency," Mike Jackson, chief executive of AutoNation Inc, the No. 1 U.S. auto retailer, told the summit in Detroit on Wednesday.

Gradually raising gas taxes to the point where fuel costs $4 to $5 at the pump will do more to stimulate demand in next-generation vehicles like General Motors Co's forthcoming Chevy Volt plug-in hybrid than any other policy initiatives, including raising the national fuel efficiency standards know as CAFE, Jackson said.

Jerry York, a former GM board member and an adviser to billionaire investor Kirk Kerkorian, agreed.

"Unless gas is $3.50 or $4 a gallon, consumers are not going to want to buy those cars," York said on Monday.

'AFRAID TO TOUCH' GAS TAX

The obvious impediment to such a move is political.

Higher fuel prices in the midst of a fragile economic recovery would likely be extremely unpopular even with consumers who favor "green" issues and less dependence on foreign oil.

Consumer sentiment toward car companies may also be at a low that is rivaled only by their attitudes toward big oil companies, particularly after the federal government pumped more than $100 billion into GM, Chrysler and other auto industry players to prevent their collapse during the most brutal economic downturn the United States has faced since the Great Depression.

"In the United States, we're afraid to touch the fuel price," said Tim Leuliette, chief executive of privately held parts supplier Dura Automotive.

"We've got to continue to raise taxes in the United States so that, by the end of the next decade, gas is about $8 a gallon in today's terms," he told the summit on Tuesday.

"What you have to do is do it in a manner that is slow enough and predictable enough that vehicle selection and choices by people over the cycle can be made in a logical way," he said, a point also emphasized by Jackson of AutoNation.

Such a shift would also help the global auto industry, which today produces an entirely different lineup of cars and light trucks for the U.S. market than Europe, where fuel tends to cost two to three times more than in the United States.

"The cars that America wants are typically cars that only work in America because of our fuel prices," Leuliette said. "What we've created in the United States is an artificial environment."

MANAGEABLE SHIFT

As long as tax rates rose gradually, higher fuel prices would not become an onerous burden on consumers, the auto executives said. A floating tax rate would also smooth out sharp swings in the price of gasoline, which tracks the sometimes-volatile oil market.

"If we migrate slowly over years to $4 or $5 a gallon, everybody will adjust, everybody will manage. It's not a problem," Jackson told reporters.