Key Publications - Is the ’Gas Tax Holiday’ a Good Idea?

Both Republican candidate John McCain and Democratic candidate Hillary Clinton are advocating a gas tax holiday this summer for consumers. While their plans vary somewhat, they both want to suspend the 18.4 cent federal tax on gasoline and the 24.4 cent tax on diesel. Most economists and Democratic presidential candidate Barak Obama say it’s a bad idea that will not work. (CNN)

Clinton says that consumers need a break at the pumps and that her plan differs from McCain’s because his will cost the government up to $10 billion in money that would be needed to fix roads that ordinarily would come from the gas tax. She says she plans to establish a ‘windfall profits tax’ on oil companies of 50 percent on profits over a certain amount. She says she would also close $7.5 billion in oil and gas loopholes while monitoring gas prices for manipulation. (CNN)

But Barak Obama says the idea of suspending gas taxes is a political scheme that would save the average consumer only $25 to $28 for the summer. “It’s typical of how Washington works—let’s find some short-term, quick fix, even though we're not really doing anything,” Obama said. (CNN)

So as gas prices soar and summer nears, should American consumers expect some sort of relief in the form of a suspension of gas taxes? Should the federal government continue to charge nearly 20 cents a gallon in taxes while prices are so high? Is there anything the government can effectively do to try to reduce the cost of gas for consumers?

Some analysts do concede that in pure theory, reducing the fuel taxes would result in consumers seeing savings both at the pump and in other products due to a reduced price of fuel such as in food and other consumer goods that are transported to stores and in lowered airline fares and so on. But they say those theoretical benefits cannot be guaranteed because of basic laws of economics which predict that if the price is reduced, demand would go back up. (Newsweek)

Critics say an increased demand for gas over the summer months would cause the base price of gasoline to go up even higher than it is now. And they say the ‘windfall profits’ Clinton proposes taxing are not as big as they may seem. When compared to other industries, the percentage of profit is not that large for oil companies. While pharmaceutical companies and banks averaged 15 cents profit for every dollar earned, and software companies averaged 25 cents for every dollar, the major oil companies made about 8.6 cents profit per dollar earned and refineries made about 4 cents profit per dollar. (MSNBC)

But Sen. Clinton says the issue of reducing the price of gas at the pump is critical and that she’s not concerned that economists are somewhat universally opposed to her plan. “I'm not going to put my lot in with economists. ... We’ve been, for the last seven years, seeing a tremendous amount of government power and elite opinion basically behind policies that haven’t worked well for the middle class and hard-working Americans,” Clinton said. (ABC News)

But Sen. Obama said her plan is “a classic Washington gimmick” that would only save consumers about 30 cents a day. “This [issue] defines, I think, the difference between myself and Senator Clinton,” Obama said. “It is a political response to a serious problem we have neglected for decades,” he added. (Washington Post )

Likewise House Speaker Nancy Pelosi opposes Clinton’s plan saying, “It would defeat everything that we have been trying to do to lower the cost of oil. We could do better by the consumer by not refilling the Strategic Petroleum Reserve.” (FOX News)

So who is right? Is it worth the effort to try to reduce gas prices by roughly 18 cents a gallon by temporarily lifting the federal tax? Or will that savings quickly be erased due to increased demand? Would refilling the Strategic Petroleum Reserve work better? What risks are involved with that plan? What is the best way to reduce the price consumers are paying for gasoline in the United States?