Gas Tax Holiday Is a Stupid Idea

Who needs satire when you have politics?

By Brendan Moore

04.30.2008

It’s a pretty safe bet that most of you reading this know that Hillary Clinton and John McCain, candidates for the U.S. presidency, have put forth the idea of a “gas tax holiday” this summer whereby the federal gas tax of 18.4 cents per gallon will be suspended. And Barack Obama, the other presidential candidate, has come out as opposed to the idea.

You read the title of this article so you already know what I think about it, but let me elaborate. A gas tax holiday is an incredibly stupid idea. Not as stupid as ethanol from corn, but still blindingly stupid.

First of all, if you want people to drive less and use less gasoline, as almost everyone now states is in our best collective interests, including the two candidates pushing for the gas tax holiday, you raise the price of gasoline, not lower it.

Second, there are not enough stocks of gasoline available to make up for any sudden and short-term increase in consumption. The price of gasoline will quickly adjust itself upward as gasoline becomes more scarce, which means that the oil companies will get the margin between the previous market price and the new market price, which will probably be very close to previous price before the tax suspension. That margin is pure profit for them. The savings envisioned as going to consumers will simply be more profit going to the oil producers.

Third, that tax pays into the Highway Trust Fund, which builds, maintains and improves roads and bridges all over the United States and is already facing a 3.4 billion dollar deficit at this moment. This activity not only employs a lot of people, it makes travel safer and faster. How many people are employed by road and bridge construction? The federal transportation department says every $1 billion in highway spending creates 34,779 jobs, which means the gas tax holiday could cost 300,000 construction jobs. And safer and faster travel means less people die or get injured in vehicles, and, it means less gasoline is consumed while those vehicles are traversing the highways of this great land. It allows people to not use (and buy) as much gasoline as they would otherwise.

Its things like this that make me loathe politicians at times. Even the most cursory analysis of the situation will produce the conclusions I laid out above, and those conclusions produce the assessment that it’s not a good idea. Since Hillary Clinton and John McCain are both smart people, you have to believe they came to the same conclusions without much trouble and are therefore willfully ignoring what would be the right course of action in their angling for votes. It makes me a little crazy, frankly. It’s hard to respect any politician that pushes this sort of ridiculous premise to a desperate electorate.

I’m not alone in my point of view concerning the reasons that a gas tax holiday is a stupid idea.

To wit:

“That would mean the 18-cent decrease in gas taxes would represent a temporary subsidy to the oil companies”, says James Hamilton, an energy economist at the University of California San Diego.

Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center in Washington, stated, “You are just going to push up the price of gas by almost the size of the tax cut.”

Greg Mankiw, noted Harvard professor and a former chairman of President Bush’s Council of Economic Advisers, said, “In light of the side effects associated with driving … gasoline taxes should be higher than they are, not lower.”

Gilbert Metclaf, a economics professor at Tufts University currently working with the National Bureau of Economic Research said about the gas tax holiday proposal, “I think it is a very bad idea. If we want people to invest in energy-saving cars, we need some assurance that the higher price paid for these cars is going to pay off through fuel savings,” he said. “It is a very short-sighted, counterproductive proposal.”


No one has ever claimed that politicians get elected appealing to voters’ logic and grasp of the facts, but let’s hope that enough voters passed Economics 101 so that this staggeringly poor idea is not rewarded at the ballot box.

COPYRIGHT Autosavant.net – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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14 Comments

  1. Correct on all points. And I’m glad that my guy Obama hasn’t been suckered into pushing for this just in the name of getting more votes. If he loses the nomination becuase of an issue as stupid as this, we Americans deserve whatever politician we elect. Americans have not been known for their long-term thinking, though, so I’m not optimistic.

    Incidentally, I voted for “the other guy” in 2000 and 2004, so the current problems aren’t my fault.

  2. Chris, sometimes there a old proverb who said “be careful for what you wish for”, especially for wishing for higher gas taxes for road maintenance.

    Here in Quebec, Canada. We got one of the big huges gas taxes and the taxes planned to go for roads, goes elsewhere here when we see the results with how the roads and viaducts are maintened here. And almost 40-45% of the gas prices here is the taxes.

    However between toll roads and gas taxes, which one is the less evil of the two?

  3. “but let’s hope that enough voters passed Economics 101 so that this staggeringly poor idea is not rewarded at the ballot box….”

    Keep on hoping. Most folks have never cracked an economics book much less taken an economics class, so logical ideas on this issue are wasted words. Obama is correct in his position on the gas tax, sadly that doesn’t mean much in an election.

    What was even more shocking to me is when Bush explained why diverting oil for the nation’s strategic reserve wouldn’t make a dent in gas prices. It was a well thought out answer, and economically sound. I had to turn my radio on and off to make sure I wasn’t daydreaming what I heard…

  4. Stephane, I didn’t say whether or not I was in favor of an increased gas tax or not in my comment (remember, I didn’t write this editorial). However, Brendan makes several excellent points, including that any short term reduction in the price of gasoline will do nothing to slow down demand or help alleviate price increases, and they’ll go right back up in the short term anyway.

    It’s obviously nothing more than election year pandering, telling voters what they want to hear, and it’s so frustratingly short sighted, just like so many things done by our country (‘our’ meaning Americans, not necessarily to include French Canadians such as yourself.) 🙂

    Michael in LA, excellent comment!

  5. Even Paul Krugman, Hillary Clinton’s advisor on economics, says it’s a really bad idea. I wonder if he’s informed Hillary of that?

  6. I thought that this site was focused on cars, not on politics. I think this is a stupid idea to mix politics to the pretty good cars oriented site as you will make a segment of visitors unhappy and your traffic may suffer. Beyond that, all your points could be disputed for a good reason, not because you’re wrong, but because there is more to the story than your simplistic approach suggests. First, it is hard to imagine that people wake up every day to check the price of gasoline to determine how much they will drive that day. Should the price suddenly go down by 5%, people will not decide to increase their gas consumption accordingly. Most of us drive because we have to, not because we need to spend our gasoline money. Second, regarding the Highway Trust Fund, there is no clear and direct connection between the amount of funds available and the amount of money spent. This is not pay as you go setup, this is “we spend what we need to and will borrow the money if we have to” approach. Finally, you’re correct in saying that you’re not alone in thinking that gas tax holiday is a bad idea, many people think that. But having a company does not necessarily make your point valid. Many people disagree with what you think today. This but itself does not make their point valid neither. I am sure that if you would decide to think that the gas tax holiday is a good idea, you would be able to find very quickly quotes to support the belief that gas tax is a great idea. Whatever you would conclude on this point, you would be able to find those who think like you do.
    My suggestion is that you stick to the cars, keep the politics away. If you really want to make your political views known, consider creating another site, separate from this one.
    Keep up the good work with Autosavant, but please dont’t mix in politics.

  7. I’m normally on your side when it comes to politics, Anon, and your points are all excellent and well-taken. Autosavant loves cars and the car business, so you’re not going to see any Big Important Decision ’08 Live Breaking Up-To-The-Minute Election Coverage around here.

    But in Brendan’s defense I’ll say this:

    If they promise to keep their politics away from our cars, we’ll keep our cars away from their politics.

    And you know precisely what’s wrong with that sentence.

  8. I’m going to re-check my sources, but from my intitial findings, it appears that most cars use gasoline. I have also discovered on this thing called the “internet” that cars generally move about over roads and bridges.

    I’m starting to think that maybe this post does have something to do with cars.

  9. Thank you both David and Plutarch for your comments. My two points were first not to dilute the value of the site by including political views that could potentially shift the focus away into an area that can be very emotional (calm down Plutarch, it’s not worth it) and divisive. I agree with you David that reciprocity is always affecting both sides and car lovers should let the politicians know their feelings. Second, once we start diving into politics, there is no end to it. Yes Plutarch, the original post had to do with cars, as cars use gas. Taking a specific political position and praising some while attacking others by using words blindingly stupid made all the difference. It was the tone, not the topic that made me concerned. Every car related issue can be politicized, which in turn will makes people take sides and create camps. Just look at some other car sites where viewers constantly insult each other in the name who’s right and who’s wrong. Is this what may happen to this site too? I do respect that others may feel differently than I do (I have no defined opinion on the gas tax issue)but how they treat those who may potentially disagree with them can make all the difference – turn people off. Feel how you want but don’t attack those who feel otherwise – my whole point.

  10. I see that the CEO of Chrysler and the CEO of AutoNation said today that the gas tax holiday is a really bad idea. So did Jim Press. Those guys are in the car business, not politics

  11. Guys, give anon a break – I’m not being flip when I say that I’m happy he cares about the site so much.

    Anon, I appreciate the feedback. Thanks.

  12. WALL STREET JOURNAL blog post that references Barney Franks’ opposition to the gas tax holiday plan, even though he’s a Hillary Clinton supporter:

    “Add Frank to the growing list of pols who have rejected the idea, including Clinton supporter and Washington Sen. Patty Murray. Others include House Speaker Nancy Pelosi, Majority Leader Steny Hoyer, New York Gov. David Paterson and New York Mayor Michael Bloomberg, who was particularly blunt on Thursday.

    “It’s about the dumbest thing I’ve heard in an awful long time, from an economic point of view,” Bloomberg, who hasn’t endorsed a candidate, told reporters. “We’re trying to discourage people from driving and we’re trying to end our energy dependence…and we’re trying to have more money to build infrastructure.”

    The gas-tax issue has flared up ahead of Tuesday’s primaries in Indiana and North Carolina, weeks after likely Republican nominee John McCain first floated the tax-holiday proposal. On Thursday, McCain defended the measure as one that would provide “a little relief” to motorists, and he used that phrase six times in less than two minutes in defending his proposal.

    Obama has broken with his Senate colleagues in opposing the measure, a move which opens him up to charges from his political opponents despite the fact that the gas-tax holiday has been roundly criticized by economists and editorial boards.

  13. We are so totally in a bad spot as a nation.

    All the candidates offer plans for reducing prices, but no one wants to talk about how the real burden lies with us. Americans have always been obsessed with their huge cars, and then their massive SUV’s after that, their freedom to drive anywhere, and (at least until now) low cost of living in the suburbs.

    We need (now, if not yesterday) to take meaningful steps toward conservation of oil we buy now, invest in alternative fuels (which doesn’t include food, like corn, into fuel for cars), and realize that prices of oil are never going to come back down in any meaningful way. Waiting for the government to take the necessary steps is like waiting to win the lottery. As for the candidates, to me they’re just gradations of incompetent. Pick your poison.

  14. I am movong, I agree with you. There are so many things that need to happen very soon so that we break the chains of oil dependency and stop fouling our air and water. And this is the solution? A suspension of the federal gas tax? It’s like a bad dream.

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