Gas Tax Holiday Is Populist, But Pointless

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.

Comments

[AlexS]

This article quotes a $3 billion shortfall in the highway fund but a search on the web reveals that the trust fund actually has a surplus of $20 billion. The politicians have historically been reluctant to spend any surplus because it hurts the deficit and roads have relatively little political stroke ("highways don't vote" as they say). So this could be done with no cost to jobs and we'd still have a surplus. I'm not sure it's a great idea, but it's not an awful idea as is suggested in this article. Chalk it up to a little more voter pandering. We've just had $150 billion in voter pandering under the heading of "stimulus package".

[petroman]

It is yet another rhetoric being used by Clinton campaign with nothing logical behind the plan. She was opposed to ethanol then favored it because it meant votes. We as Americans need to use more of our own brains and logic than to eat up the hype and rhetoric foaming from politicians. Ethanol is blended into the gasoline, now that makes an additional component to be added to gasoline with an additional cost, so one more reason for price of gas to go up and ethanol also requires more petroleum to be consumed to make ethanol.

[billddrummer]

What I fail to understand is why companies like FedEx, UPS, Delta Airlines and other large fuel purchasers haven't used forward contracts to hedge against fuel cost hikes. Was it because no one expected rates to drop so precipitously that dollar-denominated commodities would experience a huge jump in price so quickly? Or was it just short-sightedness on the part of management preferring to err on the side of quarterly earnings growth at the expense of long-term profitability?

[jcrash]

I don't understand why people aren't laughing at McCain and Clinton for supporting this Tax Holiday. $.18 per gallon less when you are already paying over $3.50 per gallon is pointless. It's not like people are going to say, WOW gas is JUST $3.32, let's drive a lot more.

They need to fix the problem...MANDATE higher fuel standards and possibly RAISE taxes on gas. Definitely, they should remove any and all tax credits for oil production.

[jackooo]

If it cost 300,000 jobs I am all for it. Think of the savings in salary, waste and benefits.....
I bet no one gives the money saved back to the government!
You can buy less gas but that will not dictate prices. Why? Because OPEC can pump less oil and put prices wherever they want. Americans cannot control gas prices. It is called free enterprise...... Ask Exxon or Chevron.

[jackooo]

jcrash
You double speak yourself. If you MANDATE higher fuel standards you will drive more and use more gas. Gotta get a leg up on that.
Raise taxes on the gas? You did say that? You make no cents.
Remove tax credits? Then they will produce less and refine less and we pay more. You have to think outta the box. What you propose is the same old same old.

[alwaysright]

The article doesn't make logical or economic sense. The huge increase in the price of gasoline has yet to change the behavior of the American drivers. I don't think there is enough public transit infrastructure in this country for behaviour to change. Consequently, a tax "holiday" would not effect behavior.

To put this in the vernacular of the economists, the demand for gasoline is inelastic.

[jcrash]

Jackooo, I'm not contradicting myself. Gas needs to cost enough that people have no choice but to cut back. And fuel standards are stupidly low. Basically, they need to outlaw SUV's and non-commercial truck purchases.

Too many idiots are driving around in V-10 duallies taking their kids to soccer practice.

[jackooo]

jcrash
If, as you suggest, gas is say $10/gal people will cut back. What happens next is the rich can drive but the poor cannot.
Now what happens to gas prices???? OPEC wanting to keep prices high pumps less oil. Results: prices stay high.
I totally agree with the dulies and suv but I consider 98% of people morons anyway.

[Jay Jay]

I keep hearing people who use a lot of gas say that gas is an inelastic commodity. I call BS, look how sales of new SUVs and trucks are taking a nose dive.