Trump's Red Diesel Order, Explained | Diving In

Justin Wolfers (0:00)

What this policy does is it cuts the cost of fuel for the trucker who drives the food to the store, but it raises the fuel cost for the farmers who actually grow that food. The cost of growing and trucking food to market isn't really going to fall. It's even worse than that. If the government no longer collects tax revenue, then our budget deficit grows. That means either next year, you and I are going to pay more taxes.

On Monday night at a campaign rally in Nebraska, President Trump signed a new executive order that he reckons will bring down the price of diesel.

Donald Trump (0:32)

Today I'm announcing another unprecedented step to bring down costs.

Justin Wolfers (0:38)

It's the latest in a long line of attempts to bring fuel prices down. Earlier this week, we dug into his so-called big G7 deal. There was less there than you might have thought. And by now his list of fuel policy announcements includes just about everything except dealing with the thing that pushed prices up in the first place, the war on Iran. This time, the plan involves changing the tax rules around something most folks have never heard of. Don't feel bad. Here's how the president described it right before he signed the order.

Donald Trump (1:08)

Red dye diesel. You know what that is? I don't know what the hell it is, but whatever it is, it's supposed to be very good.

Does anybody want to explain that? Red dye diesel, everybody.

Justin Wolfers (1:21)

Well, that might explain some of the policy. Here's what actually happened. The president took a pool of diesel that farmers used, and he opened it up to truckers, and then he promised them a tax break that only Congress, not the president, can actually deliver. And at the end of it all, guess what? America has exactly as much diesel as it had before. Not one extra drop. Okay, there's a lot to understand here, so let's dig in. Hey, I'm Justin Wolfers, I'm an economics professor, and this is Platypus Economics. I'm here to help you understand and make sense of these big economic announcements and what they mean for you and your life. So let's begin. We're going to tackle five questions and come on, let's do it together. First, at the center of this whole proposal is something called red dye diesel. Wow, it's diesel fuel, but with, wait for it, red dye in it. But what's that got to do with the cost of living? Look, I reckon someone ought to find out, and apparently it's going to be us.

Second, what does the president's order actually do? I've read it, so you don't have to. Third, the big one, does any of this get us more diesel? Spoiler, it doesn't. If you change the diesel tax some folks pay, and others don't, but you don't change the amount of diesel, all you end up doing is redistributing the existing fuel from one group to another. Fourth, what's this going to do to the cost of living? Another spoiler, nothing. Diesel gets more expensive for some and cheaper for others. We're just reorganizing deck chairs on this oil price Titanic. Who wins and who loses? In reality, the winners are going to turn out to be the one set of folks we don't need to help, the fuel sellers. They're already having a pretty great time of things right now. Oh, and fifth, all of this is about changing taxes and the president doesn't have the right to change taxes without Congress. So this whole thing rests on a wobbly kind of sort of promise, which is a very strange way to do economic policy.

Okay, let's start with the tax and stay with me. This is more fun than it sounds. Well, if you're an economist, it's a lot of fun. Everyone who drives on America's roads is subject to a federal tax to pay for the roads. That tax goes to help funding the roads, repairing the roads and so on. So whenever a truck fills up with diesel, there's a federal highway tax of 24.4 cents per gallon already built into the price.

Most of us never really see this tax because the driver doesn't write the check. The tax gets collected way back up the supply chain. When fuel leaves the terminal on its way to the pump, by the time you see the price of the pump, it's already baked in.

But not every engine drives on the road. There's tractors and combine harvesters, bulldozers and mining equipment. They all run on diesel and they do their main work off the highway. So it wouldn't be fair to charge them a highway tax. And we don't. Which creates a bit of a tricky problem. You've now got the exact same diesel fuel selling at two different prices. How do you stop someone from buying the cheap stuff made for farmers and pouring it into their truck? Here's how. You dye it red. It's like a parent with twins. You buy a 10 pack of white socks and you dye half of the pairs. You can tell them apart at the glance and you know which belongs to who, but they're still exactly the same product. Red diesel, it's the same. It's ordinary diesel with a bit of red. The dye is just the government's way of writing, tax not paid all over that fuel. And the government does check. There are inspectors whose job is to dip a stick into a truck's fuel tank and see what color it comes out. If it's red, you owe the tax plus a penalty of a thousand bucks or 10 bucks a gallon, whichever is bigger. This is where the term caught red-handed comes from. Okay, look, it's not. I'm an economist, not an etymologist. So I reckon it should be where that term comes from, even if it's not really where it comes from. The point, though, is you've got the same fuel at two different prices, and one of them, the tax-free one, the cheaper one, is red. Now, why is anyone fiddling with diesel colors or diesel taxes? Because diesel is crazy expensive right now. A few weeks ago, the national average hit a record $6.52 a gallon. It's eased a little bit since, but it's still around $2.50 more than it was a year ago. And people are hurting from those higher prices.