A Paltry $30

Sat, 10 May 2008 15:46:39 +0000

The editorial page of my local paper defends my profession against the snide remarks of Senator Clinton. We can use all the help we can get, but in the process, the paper misses why economists are so squarely against the gas tax holiday:

Speaking of sophistry, it's perhaps not surprising that Clinton would want to change the subject when challenged about her gas tax “holiday” instead of defending it on the merits. After all, suspending the tax for three months would save the average consumer a paltry $30, while doing absolutely nothing to curb demand for oil. It would also deprive the federal highway trust fund of roughly $9 billion for badly needed road and bridge maintenance and repair if Clinton's proposal to make up that amount through a new tax on oil company profits failed to become law.

It may be true that under the gas tax holiday, the average consumer would pay $30 less in federal gas taxes. But if it's paltry, then the next $30 from the average consumer would be (almost) as paltry. Would my local paper advocate doubling the gas tax over the summer? (I would, but that's because I'm more green than most and I understand the next few paragraphs.)

But even that is not why we worldly philosophers are so up in arms about this. Quoting Len Burman and Eric Toder at the Tax Policy Center blog:

Even in this alternative reality, there’s a problem. Refiners run near capacity every summer as families rack up miles on family vacations. That’s one reason why gas prices jump in the summer. If McCain’s excise tax cut translated into lower prices, we’d all want to drive more, which would push up the demand for gasoline. Since the refiners can’t produce much more without building new refineries, the price has to go back up.

Higher prices might stimulate a little more production and we might import more gasoline from our neighbors. But the price will have to increase by almost the amount of the tax cut. Otherwise, there will be shortages. Unless the plan’s aim is to boost short-term profits for petroleum refineries, the proposal makes no sense.

We don't like the policy because it won't change the after-tax cost of gasoline to that average consumer by much, and most of the $30 will shift from the government to the oil industry. So I wonder whether my local paper would still refer to $30 as paltry if the government passed a law to take that amount out of the highway trust fund for each consumer and give it to oil industry companies.