Why Cutting Gasoline Taxes Won’t Help
Prof. Hamilton has the answer. But for those of you who are too lazy to click through here is the short version.
Let’s say that the market clearing price with taxes is $3/gallon and that taxes are $0.5/gallon. So the initial view is that cutting taxes would cut lower the price by $0.5/gallon. The problem is that there is currently a shortage. So short of rationing, once the gas tax is removed prices would rise to their pre tax market clearing level. In then end there’d be little if any price relief and all that would happen is various government entities would wind up short on revenue. The added profits might provide greater impetus over a slightly longer period to bring capacity back online faster, but that is about all the benefit you’d get.