Politicians have had a lot to say as the price of energy rose in recent months. Unfortunately, some of this talk was way off the mark.

For example, some in Congress, such as U.S. Senators Richard Durbin (D-IL), Byron Dorgan (D-ND) and Charles Schumer (D-NY), actually are pushing an idea that would make matters worse. They want to hit oil companies with what's called a ‘windfall profits tax.' They fantasize that punishing oil companies will make gas cheaper at the pump.

Too many politicians merely seek to pander in the face of rising energy prices rather than dealing soberly with economic reality. In the real economic world, prices and profits play a critical part in markets. When prices and profits rise due to market conditions and changes - including rising global demand as well as problems from weather events like Hurricane Katrina - signals are sent and incentives are enhanced to invest in expanded energy exploration, development and production capacity.

Slap a so-called windfall profits tax on producers, and it's pretty obvious that production will be limited. That's the exact opposite outcome desired.

So, do politicians have any other options besides shameless pandering or doing nothing? Absolutely. They can reduce the governmental costs on energy production. That would include opening up ANWR and coastal areas for exploration, for example, and reducing obstacles for building new refineries and pipelines.

But it certainly does not stop there. Federal and state officials can reduce taxes paid at the pump.

Currently, the federal government's excise tax on gas equals 18.4 cents per gallon. Then the states pile on. The higher the state's gas tax, the less competitive the state is. That's why state gas taxes are one of the measures included in the ‘Small Business Survival Index 2005,' which I authored for the Small Business & Entrepreneurship Council. In an effort to rank the policy climate for entrepreneurship among the states, the Index ties together 26 different government-imposed or government-related costs. The gas tax is included as it affects not just consumers, but every business - from construction firms to home-based businesses paying delivery services.

As noted in the following table, based on data from the American Petroleum Institute as of July 1, 2005 and included in the Index, state gas taxes vary considerably across the nation. Georgia, for example, had the lowest tax at 7.5 cents per gallon, while New York came in worst at 42.6 cents.

State Rankings of State Gas Taxes

(Dollars Per Gallon of Gasoline)

At the federal level, there does not seem to be too much interest in reducing the excise tax. Politicians in the states have been sluggish to react on taxes as well, but there has been some movement.

For example, as the Wilson Daily Times reported on October 19, Republican state lawmakers in North Carolina are calling on Gov. Mike Easley (D) to convene a special session of the General Assembly to consider reducing the state's gas tax. Currently, North Carolina's tax includes a 17.5 cents per gallon base rate, plus a variable tax based on the wholesale price adjusted every six months. The variable tax reportedly could increase three to four cents per gallon.

In the state of Washington, the voters will get a say on November 8. Initiative 912 would repeal the motor vehicle fuel tax hike imposed by state lawmakers during the 2005 legislative session. The tax hike included a 3 cents-per-gallon increase in July 2005, followed by 3 cents more in 2006, 2 cents in 2007 and another 1.5 cents in 2008. Those tax increases hurt consumers and the state's competitiveness.

Politicians can make a difference. They can hurt consumers and businesses by piling on regulations and taxes, or they can help by reducing such burdens. So, the next time your elected representatives talk about energy prices, see if they plan on making matters better or worse.

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This column may be reprinted with appropriate credit.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.