Gas tax holiday still dumb
So, one of the sad things about starting this blog when we did was that I missed out on the chance to make fun of the idiotic gas tax holiday idea. Luckily for me, McCain brought it up again today, and I just can’t resist. I know I am far from the first to be amazed by how bad an idea this is, and by now most people with a brain understand it’s unwise. I don’t think, however, that the sheer magnitude of idiocy represented in this idea has fully sunk in, so I thought I’d add my two cents.
The main problem people seem to have with the proposal is that it is too small to have any meaningful effect and as such is more of a political ploy than a serious policy proposal. (The federal gas tax is 18.4 cents, which results in an average of somewhere around $30/month in savings for most people.) This is a totally valid criticism, but it’s answered reasonably easily with something along the lines of “Sure, it’s not enough to really solve the problem, but that doesn’t mean it isn’t at least a small help, and if the Washington elites [read: Obama] really cared about the little guy, they’d do every little thing they could.” Everyone knows that the attention on this minor proposal is political, but that doesn’t mean they’ll oppose the proposal. People are also worried (at least with McCain’s version — Clinton’s taxes oil companies to make up the difference) that it’ll either increase the deficit or reduce funding for transit. McCain, of course, plans to avoid this by magically pulling money out of “wasteful spending”. This is the apparently unlimited pool of money, of which the only specific item he’s labeled is earmarks — which he’s also going to use to pay for tax cuts, which he massively over-represents, and large portions of which are totally infeasible to cut. To add a bit of hilarity, in Tennessee, where he brought up the idea today, if this magical fiscal maneuver doesn’t work out and federal transportation money gets cut, the state gas tax automatically increases to make up the difference.
So, great, it’s a meaningless and ineffective campaign promise that has no hope of being passed. That’s dumb, but by no means unique. The real problem here is that whatever effect it does have will actually be incredibly harmful to the country. First, recognize that even the $30/month in savings will never happen, for reasons anyone who’s ever taken freshman economics will understand. Say the tax is eliminated, and prices fall that incredibly drastic 18.4 cents. The price producers receive for selling the gas won’t change (since the extra 18.4 cents previously went to the government, not them), so supply will remain unchanged, but the price consumers have to pay would be lower. That means the amount consumers want to buy will increase. Since previously supply and demand were at equal quantities, and now demand has increased, there will be a shortage. Markets solve shortages with upward pressure on prices, so the price will rise until there is no longer a shortage. In most markets this happens because the higher price partly lowers demand and partly increases supply, and the price would come to rest somewhat below the original price for savings, albeit by less than 18.4 cents. However, this is a somewhat unique circumstance, since the supply of gas is limited by the bottleneck of US refineries, which are already working near maximum capacity. That means in the short term supply can’t increase, so the shortage has to be eliminated entirely through a decrease in demand, which means lowering demand back to where it was before the tax decrease, which means raising the price up to where it was before the tax decrease… which means no savings. There will be plenty of extra profit for oil refineries, though. In the long term, this would mean people would build more refineries, and the price would go down some, but this tax break is only temporary, so it won’t even have that effect.
The consequences only get worse from there, though. It is important to remember that oil is not an amazingly competitively-traded good. Its production is controlled by a (granted, not perfectly effective) cartel. In a competitive market, suppliers keep prices low because to raise them means losing business to their competitors. A monopolist has no such fear, so the only thing that keeps them from raising prices is a fear that consumers will actually start going without such large quantities of their goods. In this case, that translates roughly as the fact that what OPEC really fears is that oil-consuming countries (i.e. us) will build efficient cars, conserve energy, and pour tons of public and private money into researching ways to live without oil. They were scared when this began to happen in the ’70s. If they see the taxes in the oil importing countries go down when prices go up, then they know that reducing production won’t actually result in a higher price for the consumer (or, not as much higher as it otherwise would be), meaning less incentive to do without oil. That means less incentive for OPEC to raise production and higher oil prices. It also means the US refineries aren’t really the ones making the extra profits — foreign governments are.
It should also be noted that gas taxes are just clearly good policy to begin with. In addition to being in effect a way to make all roads into toll roads by charging drivers the money that goes into road construction in proportion to their vehicles weight and how much they drive (the things that affect the need for road repair), they compensate for the massive negative externalities (pollution, traffic and noise, and massive constraints on US foreign policy that result in wars and deaths) that come with gasoline. These externalities are clearly worth far more than 18.4 cents per gallon. If someone was really serious about dealing with America’s energy crisis, they wouldn’t be arguing to reduce gas taxes — they’d be arguing for a massive increase. This, in fairness, would be a substantial tax increase, and it’d be somewhat regressive, but the money could easily be used to allow tax cuts for the poor in payroll taxes or other sales taxes. The end result would be a similar tax burden, and a tax system that, by disincentivizing harmful behavior, is economically helpful rather than one that disincentivizes work and other productive activities, causing substantial economic harm.
I should say that the situation is of course a little more complicated than this. In economics, nothing ever meets the theoretical ideals. US refining capacity has some room to grow, and we can import already-refined gas instead of oil if we need to. OPEC is far from perfect in its internal controls, and the US isn’t the only consumer of gasoline, so our tax reduction will hardly assure OPEC that there’s no danger in very high prices. Nevertheless, these effects are are very real and very worrying, and the policy is horribly counterproductive to general goals of energy policy in the US. In the end, the fact that the size of the tax here is almost negligible, far from being a setback, is probably the policy’s only redeeming quality.
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