Gas Tax Breaks

I am wading into this debate over whether or not the U.S. government should temporarily suspend the federal tax on gasoline this summer. I come down on the side against the tax break. Here’s why?

In a post about Windfall taxes on Tuesday, I nixed the idea saying:

John McCain and Hillary Clinton are suggesting we declare a tax holiday for the summer driving season. But, unfortunately this is not a productive way of alleviating the burden high oil places on the economy. McCain and Clinton are either fishing for votes by pandering to the general public or they don’t know much about economics. During this election campaign, McCain admitted the economy is not his strong suit, but he and Clinton are playing politics, pure and simple.

For one, a tax holiday reduces the revenue of the Federal Government. And at a time of record budget deficits and over $9 trillion in Federal Debt, our government needs all the revue it can get. Cutting taxes is fiscally irresponsible.

Moreover, the revenue the government receives from gasoline helps to pay for the Federal Highway system begun by Eisenhower in the 1950s. As a result, the tax on gasoline goes directly toward financing the roads that make driving in the U.S. a direct alternative to other forms of transportation. Taxes on gasoline are extraordinarily low in the US. For example, gasoline prices in the UK are nearly $10.00 per gallon. Prices are nearly as high in all of Western Europe.

The Europeans believe that high taxation on gasoline not only funds their highway system but also alternative means of public transport, which is sorely lacking in the United States. While the huge increase in gasoline prices is a tremendous burden for the cash-strapped U.S. consumer, one needs to consider the poor state of our transportation infrastructure in the form of crumbling roads and bridges and poor public transportation systems. $4 a gallon is nothing compared to what consumers in most of the developed world pay.

Adding to this, I would say that cutting the gas tax would increase demand for gasoline. Since global supply is tight, that would mean that the price at the pump would drop by much less than the proposed 18 cents per gallon cut. In fact, one could argue that no price drop at all would result.

What’s more is a gas tax holiday is a drop in the bucket. $0.18 a gallon is maybe $3.00 a tank. After a summer, that gets you a dinner for two at TGI Fridays, 2 cases of Rolling Rock or 3 sessions at the cheap manicure salon. Not exactly, a ton of cash.

If one wants to give consumers temporary relief, the best way is perhaps by releasing some oil from the Strategic Petroleum Reserve (SPR) as Bill Clinton did and as Hillary Clinton once suggested before she latched on to the gas tax idea.

The gas tax issue is about politics, not economics. When the going gets tough, politicians become populists.