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April 24, 2008

A Gas Tax Holiday? Not Even Worthy of Any Whatever

When John McCain first suggested a gas tax holiday, I shrugged and said "whatever" the same way I did when Congress passed the economic stimulus package. Both are nice, safe, pretty ideas, but neither is going to achieve their intended purposes. Sure, it's fun to get that $600 check, but having $600 of my own money returned to me isn't going to make me more confident about the economy. In fact, the more congressfolk who stand around wringing their hands and threatening to take further steps, the more worried I get.

The same is true for the gas tax holiday. Of course I like the idea of knocking down the 18.4 cent per gallon gas tax. But even if Congress jumps on the idea, the price at the pump isn't going to magically be a whole 18.4 cents per gallon cheaper on Memorial Day. That's not how prices work. The price benefit of a tax holiday is going to be split between consumers and sellers, probably by about half (given what we know about national elasticities of supply and demand for gasoline). And that ain't much.

The alternative is having the government muck about and impose self-defeating measures to force the sellers to pass on all 18.4 cents. Because government-regulated creative accounting hasn't caused problems before... And it's still only 18.4 cents per gallon.

If people want to get serious about reducing the price at the pump then there are very few short-term answers. It's no simple thing to increase the supply of gasoline in this country. And--as $4.00 per gallon gas has proven--it's no simple thing to lower demand; folks are still busily pumping away at every gas station I pass.

One avenue that should be explored is cutting state gasoline taxes. Of course, this would require action in the state legislatures, and then McCain couldn't hold himself out as some kind of hero of the people. State and local gas taxes are typically larger than the federal tax. More importantly, state gas taxes overwhelmingly increase the price for consumers more than they do for sellers.

A state tax holiday would correspondingly benefit consumers to a much greater extent than a federal one, making John McCain's suggestion not even worthy of any whatever.

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posted by Gabriel Malor at 03:22 PM

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