Wednesday, April 30, 2008

Obama takes the right position on 'gas tax holiday,' even though it will cost him votes

Gas is creeping upwards towards $4.00 per gallon (diesel heading towards five) and may get there this summer. Voters want to see gas prices go down. So both John McCain and Hillary Clinton have proposed a Federal 'gas tax holiday' during the summer (peak driving season.) Clinton, to her credit, at least has a plan to offset the loss of revenue-- earmarked for highway funding-- with a windfall profits tax on oil companies. I guess McCain would just as soon sacrifice the quality of American roads to serve his own short term ambition of getting elected President. Of couse he flies everywhere anyway so I guess he never has to worry about a pothole doing thousands of dollars worth of damage to his car.

However the candidate showing real leadership here is Barack Obama. In the face of the demands for a 'tax holiday,' he is making the difficult case that cutting off the gasoline tax won't reduce prices, and whether offset by a Federal windfall tax on oil companies as Clinton proposes or offset by not funding highway repairs as McCain proposes, either way in the long run it will cost more, not less.

For starters, in an economics 101 class you will learn that if you decrease the price on any item, demand increases. But if supply does not, it puts upward pressure on price which in turn leads you back to the same equilibrium point, a price at which demand equals supply. That is as true for gasoline as for any other commodity, which is the point that economists are making, Senator Obama understands and Senators Clinton and McCain either don't understand or choose to wilfully ignore in their reckless search for votes.

WASHINGTON (MarketWatch) -- As summer approaches, Hillary Clinton and John McCain have found a common problem and a common solution. Both want to suspend the federal tax on gasoline, giving drivers a break from high prices at the pump.

At first glance, that sounds like a great idea. But if economists are right, it's their fellow senator Barack Obama who's got the better idea when it comes to the gasoline tax: Do nothing.

Both McCain and Clinton would suspend the 18.4 cents a gallon tax on gasoline. Clinton said Monday that she would also suspend the 24.4 cents a gallon tax on diesel this summer...

It would appear that Obama is risking a chance to win populist points by not standing behind a tax break, particularly when gasoline is at a punishing $3.65 a gallon. But if it's real relief the candidates are looking for, economists say, they should look elsewhere.

"I don't think that a gas-tax cut would result in a really big drop in gasoline prices," said James Hamilton, a professor of economics at the University of California San Diego. It's simple economics: Without a corresponding increase in supply, he added, the price would rise again.

Boosting supply at this stage would be difficult. In the summertime, refineries run at close to full tilt to meet expected demand from vacationing families and other summer drivers.

Since the refiners can't produce much more without building new refineries, the price has to go back up," wrote Len Burman and Eric Toder on TaxVox, the blog of the Tax Policy Center. (Their post is titled "What Were They Thinking???") "Unless the plan's aim is to boost short-term profits for petroleum refineries, the proposal makes no sense...

It might seem axiomatic that cutting taxes on gasoline would make it cheaper. But economists also say a side effect of cheaper gas would be increased demand for fuel as more people drive. That, they point out, would put prices right back where they started.

"They'll bid the price back up," said Andrew Samwick, a professor of economics at Dartmouth College and a former economic adviser to President Bush.

In fact, if the Clinton plan is adopted there is nothing to prevent the oil companies from passing the tax right back to the consumers while if the McCain plan is adopted then sooner or later the highway repairs will still have to be done, which means that some other tax will have to be used for the purpose and likely raised. So what we really see is that there is no such thing as a free lunch, just politicians who promise you one.

Obviously while Obama is right on this one, it is going to cost him votes. But sometimes leadership means doing what's right, even at a price.

The truth is, the reason for the high gas price is because we spent so many decades doing nothing (recall that Jimmy Carter had a plan to make America self-sufficient in energy by 2000 but except for the Alaska pipeline, a small part of it, Ronald Reagan dismantled the whole plan.) Just a couple of months ago, Congress passed the first increase in CAFE standards since 1978. And America is a nation of cars, partly because we lag the rest of the world in investment in mass transit (and then, like in the case of the Phoenix light rail system, we wait to build it until decades after it is proposed, and therefore at dozens of times the cost.)

We will need a comprehensive long term energy policy (which the next administration can and should put together and propose,) not a short term bandaid which will in the end save you nothing.


Trooper York said...

One interesting thing yesterday. President Bush met the Super Bowl champion Giants and told them he was sending Jessica Simpson to the Democratic National Convention.

I would be afraid. I would be very afraid.

Anonymous said...

I liked the "gas tax holiday" at first.. after all, who doesn't like a holiday? and who doesn't like paying less taxes?

Well, I watched Obama's speech about the gas tax holiday and realize it's all bogus. I didn't believe him (or you) at first, but then I ran the numbers myself. If I significantly *over*-estimate my gas consumption, then I can expect the "holiday" to save me about $20.53 this summer. Based on what I paid last week, that's less than half a tank of gas. yay!!......

Good post, Eli. Thanks for pointing this out.