Outside the Beltway

Rand Paul’s Pointless Gimmick: The Gas Tax Holiday

Rand Paul has borrowed a bad idea from the 2008 Presidential campaign.

Doug Mataconis · Wednesday, May 18, 2011 · 10 comments

Yesterday, Kentucky Senator Rand Paul spoke on the Senate floor, and proposed a four month gas tax holiday to help Americans deal with the increased price of gas:

WASHINGTON, D.C. – Today, Sen. Rand Paul proposed a plan to reduce the burden on Americans facing ever-increasing prices at the gas pump. This amendment, which will be proposed to any energy bill that comes before the Senate, would eliminate the profit per gallon the federal government receives every time we fill up our cars, and will offset the loss in revenue with cuts to foreign aid.

Last week, oil company chiefs were called to testify in the House, where Democrats berated them for turning a profit on the product they offer consumers. While oil companies make an average profit of $0.07 per gallon of gas sold, the federal government collects nearly three times that in taxes. The Democrat solution to this is to raise taxes on the oil companies – a cost that will undoubtedly be passed on to consumers.

“Eliminating the federal gas tax passes on a $0.184 saving per gallon to consumers. Raising taxes on the companies that provide this product would have the opposite effect,” Sen. Paul said. “The only real solution to this problem in the short term is to eliminate the government’s cut and pass the savings on to consumers.”

While some worry that eliminating this tax will lead to a decrease in revenue for the Highway Trust Fund, Sen. Paul has a solution for that as well: “Every dollar that is lost in the highway trust fund from the gas tax holiday will be replaced by cuts in foreign aid and in corporate welfare,” he said.

Here’s the video of Paul’s Senate floor speech:

Senator Paul is not the first person to come up with this idea. Back during the 2008 Presidential campaign, both Hillary Clinton and John McCain proposed a gas tax holiday for the summer in response to a similar increase in prices at the pump. At the time, then-Senator Barack Obama criticized the idea as a gimmick, and the idea of a gas tax holiday became an issue during the final months of the Democratic Primary:

Back then, Sam Stein at The Huffington Post tried to find even a single economist, from either side of the political aisle, who thought this was a good idea, and he couldn’t:

I started with what I thought would be my best shot, the libertarians. Jerry Taylor, a fellow for the Cato Institute, unfortunately, called the proposal a “holiday from reality.”

“What would happen more likely than not, gas taxes would be cut, but pump prices wouldn’t go down, service stations would just continue charging what they are charging,” he said. “I’m a Libertarian and I don’t mind that. But you might not be a Libertarian and you might believe the federal treasury needs that money… Now if this were a permanent reduction of the tax, I would be all for it.”

Alright, one “no.” Perhaps the free-marketers would be of a different ilk. I was wrong.

“I think it is close to political pandering,” said Max Schulz, a senior fellow at the Manhattan Institute. “It is bad policy and political gimmickry. If you want to deliver relief to folks you have to do more than just this little holiday from the gas tax. You have to address what is driving the price of crude oil, even problems with the weak dollar. You aren’t going to win any points doing that, however. But you will get points if you get up and say let’s suspend the gas tax for a few months… I never have seen the wisdom of playing gimmicks games of the tax code.”

Who, I asked, would favor the proposal? “Political advisers to candidates,” was Schulz’s response. “It is entirely due to the focus of the presidential election coinciding with the summer.”

From Schulz, I moved on to the conservative crowd. But Ken Green, an energy expert for the American Enterprise Institute, ended up being similarly dismissive.

“There would be economic sense in eliminating the gas tax completely and replacing it with tolls. That would make sense,” he said, “but if you remove the tax now, the things being funded with the money will still need funds. Or it will be funded with taxpayer’s dollars from other things. So it will be less at the pump and more in your tax bill.”

Stein had similar bad luck on the left side of the spectrum:

Bob Sussman, an energy analyst with the Center for American Progress, and, for full disclosure, a supporter of Barack Obama, saw little benefit or popularity to either Clinton or McCain’s proposal.

“Rather than indiscriminately suspending the gas tax, if we have a revenue source here to help people in need, we out to target the money to people who really need it. And if you suspend the gas tax you are giving a small break to every body instead of a significant break to the people pinched by the high prices,” he said. “They might appreciate a small economic break. But I haven’t heard anyone clamoring for this.”

(…)

Finally, I got a quote from Robert Shapiro, formerly the undersecretary of commerce in the Clinton administration and the author of “Futurecast.” An independent voice with ties to the former first lady, however, did not give the expected results.

“Stated as clearly as I can,” he wrote, “it’s utterly misguided both environmentally and economically. Environmentally, it does actual harm, since it reduces the price of producing greenhouse gases. And economically it’s trivial or worse — by reducing the price of driving it encourages more of it, thereby increasing demand for gasoline, which inevitably pushes the price back up – the consumer gains nothing, and the oil companies and OPEC collect the extra bucks instead of the government.”

Harvard’s Greg Mankiw, a veteran of the Bush Administration agreed with this assessment:

Harvard professor N. Gregory Mankiw, who has written a best-selling textbook on economics, said what he teaches is different from what Clinton and McCain are saying about gas taxes. “What you learn in Economics 101 is that if producers can’t produce much more, when you cut the tax on that good the tax is kept . . . by the suppliers and is not passed on to consumers,” he said.

Even Hillary supporter liberal economist Paul Krugman agreed:

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.

Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories. The McCain/Clinton gas tax proposal comes too late for that. So it’s Econ 101: the tax cut really goes to the oil companies.

Moreover, even if the price decrease were passed along to the consumer, the actual savings would be minimal at best. Back when this was being debated during the 2008 campaign, I ran the numbers and determined that it would have amounted to a mere $70.00 over the course of  the summer. Not even enough for groceries for a week for the average family.

And that’s not the only problem.

As we all know, price of oil and the price of gas are influenced more by futures markets than they are by immediate prices. The fact that an 18-cent tax may be suspended for a  four month period — even though we all know it isn’t going to happen — is not likely to have any impact on those markets and any increase in the per-barrel price of oil is likely to wipe out any impact that a gas tax holiday might have.

In other words, this is political pandering based around the idea that the average voter doesn’t really understand macroeconomics. Tell people you’re cutting a tax, and they’ll think they will been fit from it. When reality hits, the election is over and you’re safely in office.It’s the same game Washington has been playing for far too long. And, frankly, I’m sick of it.