Gas Tax Politics

Both John McCain and Hilary Clinton have jumped on the promise of a reduction in gas taxes as the way to ease the burden of rising prices on potential voters this summer. In his news conference, the President also seemed to endorse this as the solution. They would eliminate the 18.4 cent federal gas tax and the 24.4 cent diesel tax between Memorial Day and Labor Day, a step that could cost the government about $10 billion in revenues.

Obama, on the other hand, is opposed to this action. In 2000, as a member of the Illinois Legislature, he voted in favor of a similar proposal. Is this a flip-flop? Or is it the ability to examine an executed policy and see its flaws. It is easy to suggest a change and be mistaken about its impact. None of us can predict the future with certainty. But it ought to be easier to analyze something that has already happened, in the not too distant past, and assess whether it worked and should be continued. Unfortunately, it seems to be almost impossible for politicians to admit the error of their ways (see George Bush over the past 7 ½ years).

The Republicans have already started using this as a campaign ploy. Clinton must be preparing her ads right now. Alex Conant, a Republican National Committee spokesman, said the following on April 28, 2008:

Barack Obama's argument that immediately reducing gas prices won't help American commuters is shockingly naive and out of touch...Gas tax relief worked when Barack Obama voted for it in the Illinois legislature, and it would work nationally now.

Michael Dobbs, in yesterday’s Washington Post reported on the results of the Illinois gas tax break.

When gas prices hit a shocking $2 a gallon in Illinois in the summer of 2000, politicians demanded action. As a Democratic State senator, Obama joined other lawmakers in pushing through a six-month suspension in the state's 5 percent sales tax on gasoline. While there was some talk about making the moratorium permanent, the tax was reinstated in January 2001, after Illinois Governor George Ryan told lawmakers that the state could not afford to continue the tax break.

The gas tax moratorium proved politically popular in Illinois, but economically questionable. The Illinois Economic and Fiscal Commission estimated that the state lost $175 million in revenues during the six-month period. A subsequent study by the National Bureau of Economic Research showed that gas prices fell by 3 percent, meaning that only three fifths of the savings from reduced taxes was passed on to consumers.

"It turned out to have a pretty small effect," said Joseph Doyle, an assistant economics professor at the Massachusetts Institute of Technology. "Consumers were slightly better off, but the benefits were spread very thinly, and the government was a lot worse off."

A poll by the Chicago Tribune showed that only 28 percent of motorists believed that they were actually paying less for gas as a result of the temporary suspension of the tax. Obama has changed his mind dramatically on the tax cut since voting for it back in 2000 in Illinois. On the campaign trail Monday in North Carolina, he described the proposal as a "short-term quick fix that we can say we did something even though we're not really doing anything."

Some economists say that a nationwide "gas tax holiday" would have even less impact on gas prices than temporary state moratoriums, such as the one passed by Illinois in 2000. "It's basic economics," said Leonard Burman, director of the Tax Policy Center, a non-partisan think tank. "Gas is always in very short supply during the summer, which is why prices go up. In order to reduce the price, you would have to increase supply, but that is difficult over the short term, because the refineries cannot add capacity."

James Hamilton, professor of Economics at the University of California-San Diego, said that most of the benefits from a temporary tax moratorium would likely go to producers rather than consumers. He said that states that suspend gas taxes are able to respond to rising demand more efficiently than the country as a whole, because gasoline supplies can be easily moved from one state to another.

"Prices would certainly rise to the market-clearing level," said Hamilton. "I would expect the price [of gas] to go back to very close to where it was before [the tax cut], in which case consumers would not see any benefit."

Another economist, Jeffrey Perloff, of UC-Berkeley, agreed that a federal tax moratorium would likely have less impact on consumer gas prices than a state moratorium. He said his models showed that a suspension of the 18.4-cent federal tax on gasoline would likely result in a temporary 9 to 12 cent reduction in the cost of a gallon of gas to the consumer, with the remainder of the reduction coming in wholesale prices.

The facts just don’t support the policy suggestion. Every day we see the results of a Bush Administration that has ignored facts in order to further their ideological beliefs or to fool a too easily led public into ignoring government actions that go against their own interests. For McCain to fall into the Republican response is no surprise; for Clinton to adopt this approach is distressing.