Let’s do a gas-tax holiday. That will solve our problems at the pump.
Brilliant!
All I can figure is that presidential candidates John McCain and Hillary Clinton must have been swilling Guinness before deciding to endorse a summertime federal gas-tax holiday.
If this is the best that two of our three leading presidential candidates can do in addressing our economic and energy problems, we’re in more trouble than I thought — which is plenty.
If enacted, a gas-tax holiday would take its place in the annals of ill-considered economic policy — right up there with cutting money supply in the early days of the Great Depression and handing out “Whip Inflation Now” buttons during the stagflation of the 1970s.
Here’s why: Gasoline prices are painfully high for plenty of reasons.
Global demand, fueled by economic growth and increasingly Americanized lifestyle aspirations in places like China and India, is growing faster than global supply. The price of crude oil, which is denominated in dollars in the world market, rises when the value of the dollar declines, as it has in recent years. And commodity prices, including crude and gasoline, have soared as investors sought to hedge against rising prospects of inflation. Last week’s crude-oil spike past $120 a barrel had some prognosticators warning about $150 and even $200 per barrel oil over the next year.
Big Oil argues that energy prices are higher than they otherwise would be because of political resistance to tapping reserves in environmentally sensitive areas offshore and along the north slope of Alaska, and resistance to adding refining capacity in this country.
A lot of other folks counter that Big Oil is up to its corporate coffers foot-dragging on the supply side of the equation, and perhaps nefarious market manipulations. Even the Rockefeller family has challenged Exxon Mobil to invest more in alternative energy options.
But one thing that definitely hasn’t contributed to the recent run-up in the price of gasoline is the 18.4 cents-a-gallon federal fuel tax, which finances needed road and bridge work. That tax, which at current retail prices is roughly 5 percent of a gallon of gasoline, has remained essentially constant for years, even as the needs of this nation’s crumbling infrastructure have become more apparent.
So what would be the effect of suspending the federal gas tax for the summer? At the federal level, about $9 billion for road projects would be lost. The average driver, meanwhile, theoretically would save about $60 — less than one tank of gasoline for the typical gas guzzler.
Or would they?
Consider this fairly basic economic question: What happens when the price of something temporarily goes down in a marketplace where demand is growing faster than supply? You guessed it — demand increases, and the price goes back up.
Duh.
Proponents of a gas-tax holiday contend that the lost federal revenue could be restored by repealing some tax breaks for energy companies, or imposing a windfall profits tax. But that would tend to discourage efforts to increase supply.
The central irony in all of this gas-tax holiday talk is that the biggest winner most likely would be Big Oil, which would have more room to raise prices at the pump in the temporary absence of the gas tax.
If you don’t believe me, just listen to what Martin Feldstein, a Harvard University professor and president of the National Bureau of Economic Research, had to say about the gas-tax holiday last week on CNBC: “The beneficiaries will, at least in part, be the people who are oil producers and not the American consumer.”
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