The idea of a gasoline tax holiday might make good politics, but it surely doesn't seem like good policy. Most economists will say that it would be bad energy policy, bad tax policy, bad urban policy and bad climate policy. And gas prices won't fall much in the end, anyway.
Some background: Sen. John McCain (R-Ariz) on Earth Day proposed to suspend the 18.4-cent-per-gallon federal excise tax on gasoline for the summer because of high pump prices. Today Sen. Hillary Clinton (D-N.Y.) matched McCain's proposal, evidently hoping to appeal to Americans livid about the record price of gasoline as the summer driving season approaches. (The Energy Information Agency said today that the U.S. average retail price for regular gasoline jumped 9.5 cents a gallon over the last week, to a new high of $3.60 a gallon.)
But does the tax holiday proposal make any sense?
On energy policy, consider the the laws of supply and demand. If high demand is propping up oil prices, cutting fuel taxes will only keep demand high and prevent oil prices from dropping. That will maintain our dependency on foreign oil by keeping demand high. If oil supplies are relatively constant, there will either be shortages or no change in prices. In fact, either McCain’s or Clinton's proposal could effectively hand a small portion of forgone tax revenues to consumers and the rest to oil producers or oil companies in the form of bigger profit margins.
The idea of a gasoline tax holiday also contradicts the presidential candidates’ positions on climate change legislation. All three remaining candidates support a cap-and-trade system that would increase the cost of all fossil fuels that emit carbon dioxide when they are used. The gasoline tax holiday would be doing just the opposite – and gasoline accounts for nearly half of U.S. oil use. Paul Bledsoe, Director of Communications and Strategy at the National Commission on Energy Policy, frames this contradiction nicely: “It's antithetical to where energy policy is moving generally, which is to put a price on fossil fuels and put in market systems that encourage efficiency and alternative technology deployment. This is a little give with one hand and take with other. In that regard, it doesn't seem terribly wise or thoughtful long-term policy.”
In addition, the gasoline tax is a dedicated revenue stream. That means it's set aside for the Highway Trust Fund, instead of counting in the general use Treasury funds. So any reduction in the tax would either result in a cut in highway spending (never mind all the talk about repairing bridges) or would require a diversion of other tax receipts to replenish the Highway Trust Fund. This would effectively be a subsidy by all taxpayers (including anyone who takes mass transit to work) for people who drive automobiles.
(Unlike McCain, Clinton spells out how she would deal with this problem. She says that she would impose a windfall profits tax on oil companies to cover lost revenues to the Highway Trust Fund.)
Finally, it’s not as though U.S. gasoline taxes are excessive by global standards. The U.S. gasoline tax was last increased in 1993 as part of the first Bill Clinton budget, and that was a slimmed-down version of what President Clinton had sought. It also pales beside gasoline taxes in Europe, where gasoline prices are more than twice as high.
Len Burman and Eric Toder of the Tax Policy Center make a pointed critique of McCain’s idea in this essay.
They say: “For a moment, forget about whether encouraging fossil fuel burning makes sense during a time of global warming, whether we should raid the highway trust fund when bridges are collapsing for lack of maintenance, or the disconnect between the proposal to cut gasoline taxes and the candidates’ endorsement of “cap-and-trade” limits that would raise gasoline prices….
“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.”
Where’s Sen. Barrack Obama (D-Ill.) in all this? As an Illinois state legislator, he backed a temporary cut in the state gas tax in 2000. But last Friday he said he opposed a national tax holiday because it would lead to a $10 billion shortfall for the highway trust fund. “You don't know that the oil companies are going to pass the savings on to the consumers, or if you'll just see an increase in prices by the same amount that the gas tax goes down," Obama said. "And it would deplete the Highway Trust Fund that we need for rebuilding our roads and our bridges."