Gas Tax Holiday Is Populist, But Pointless

by: Research Recap

The idea of a “gas tax holiday” proposed by John McCain and embraced by Hillary Clinton may be politically popular but gets a resounding thumbs down from economists.

“Score one for Obama,” wrote Greg Mankiw, a former chairman of President George W. Bush’s Council of Economic Advisers, as reported by Reuters. “In light of the side effects associated with driving … gasoline taxes should be higher than they are, not lower.”

Economists said that since refineries cannot increase their supply of gasoline in the space of a few summer months, lower prices will just boost demand and the benefits will flow to oil companies, not consumers.

“You are just going to push up the price of gas by almost the size of the tax cut,” said Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center in Washington.

Barack Obama criticized the plan as pure politics and said the only way to lower the price of gas is to use less oil.

“It would last for three months and it would save you on average half a tank of gas, $25 to $30. That’s what Senator Clinton and Senator McCain are proposing to deal with the gas crisis,” he said on Tuesday in Winston-Salem, North Carolina.

According to the Autopia blog, The Arizona Republic - McCain’s hometown paper - says the average Phoenix commuter will save $23 under McCain’s proposal. The American Association of State Highway and Transportation Officials says the average American will save $28.

On the other hand, the Republic found, suspending the gas tax for three months would free up $88.36 million in consumer spending throughout the greater Phoenix area. And companies like FedEx that are losing their shirts to high fuel prices could use some relief:

But McCain’s proposal could cost the government some $9 billion dollars - and more than 300,000 jobs.

The tax supports the federal Highway Trust Fund, which finances road projects nationwide and is already facing a $3.4 billion shortfall, the American Association of State Highway and Transportation Officials says. The American Society of Civil Engineers says every dollar invested in highway infrastructure generates $5.40 in economic benefits through reduced delays, improved safety and lower vehicle operating costs. And the federal transportation department says every $1 billion in highway spending creates 34,779 jobs.

“You don’t want to stimulate consumption,” Lawrence Goldstein, an economist at the Energy Policy Research Foundation, told the New York Times. “The signal you want to send is the opposite one. Politicians should say that conservation is where people’s mindset ought to be.”

Paul Krugman calls it “a really bad idea":

The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it’s pointless, not evil. But it is pointless, and disappointing.