Why the 'Gas-Tax Holiday' Would Be No Vacation


I didn't plan to take a holiday this summer, but politicians are trying to foist one on me.

What's more, the reason given -- to ease the cost burden of gasoline-- doesn't even seem like it will pan out.

Presidential candidates Sen. Hillary Clinton (D., N.Y.) and Sen. John McCain (R. Ariz.) want to convince me that proposals for a summer-long "gas-tax holiday" will ease the burden of $4-a-gallon gasoline for my family.

Politicians and oil companies, however, may be the only beneficiaries of these proposals if uninformed voters buy into the plans.
Exxon Mobil (XOM) announced a $10.89 billion first-quarter profit last week. Investors balked, partly due to concerns about decreasing production. But the fact remains that Exxon has enjoyed its second-best quarterly profit in its history.

Sen. McCain wants to suspend the 18.4-cent per gallon federal gasoline excise tax -- which funds highway repairs -- and stop summertime purchases for the Strategic Petroleum Reserve, the nation's emergency petroleum stash.

Sen. Clinton announced a proposal to temporarily suspend the gas tax and pay for it by imposing a windfall tax on oil companies, such as Exxon Mobil, Conoco (COP), BP (BP) and Chevron (CVX). Sen. Clinton also proposes stopping purchases for the SPR, but would also release some fuel to ease market volatility when the supplies are short.

How many people are listening to minutiae when the words "gas tax holiday" are dominating the airwaves?
I asked some economists what they thought about the so-called gas tax holiday. Here's what I learned:

"It's a complete sham," said Len Burman, director of the Tax Policy Center, a non-profit tax policy research service in Washington, D.C.

"There are serious problems facing the country, and it's distressing to have politicians use their bully pulpits to talk about this non-starter."

Burman adds that the chance Congress will enact either of the proposals by Memorial Day is virtually zero.

Consumers shouldn't expect to pay 18.4 cents less per gallon in the event of a gas-tax holiday, according to Jeff Perloff, an economist at the University of California, Berkeley. That's because the "tax incidence" -- those who ultimately pay for the tax -- is shared among numerous players, including refiners and producers.

The government collects the federal gasoline excise tax from producers or refiners -- not directly from consumers. But only a portion of that tax burden, typically one-half to two-thirds of the 18.4 cents, is actually passed along to consumers in the retail price reflected at the pump.

At best, consumers may save between 9 and 12 cents a gallon (only about $25 during the summer season for my car).
But cheaper gas means people will use more fuel. And when demand increases, gas prices go up.

As Perloff explains, "During the summer, many local refineries are close to being capacity constrained. If demand shot up because of a shift in demand due to removing the tax, that could drive the price up if the capacity constraint is hit."

He also notes that pollution problems are often worse during the summer. "That may be exactly the wrong time to increase demand for gasoline by cutting taxes," he says. Then, there's Sen. Clinton's proposed windfall tax on oil company profits: Would my family ultimately end up paying for a piece of this, too, when we fill up our minivan? Too many politicians know just the right phrases, such as "gas-tax holiday," to make Americans feel good. But the economics of gas prices require a far more complicated analysis than a two-second sound bite can convey.

True leadership regarding gas prices, I think, means advocating fuel conservation and asking Americans to suck it up in a different way -- not by driving, but by staying home.

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