Gas Tax Holiday: A Good Political Issue, But Not Such a Great Idea

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A smart Democratic strategist suggested to me yesterday that one reason we have reached the point where the battle for the Democratic nomination has disintegrated into an argument about flag pins and ministers is that the candidates chose, early on, to make it “a race about nothing.” Rather than the kind of great ideological contests we’ve seen in the past, where there have been real differences on the big questions that face the country (see: Carter/Kennedy, Dukakis/Jackson, Gore/Bradley, Kerry/Dean), Hillary Clinton and Barack Obama have relatively small differences on actual issues, and instead are running on biography and character, change vs. experience.

So it’s interesting–and refreshing, really–to see an actual difference of opinion emerging on the question of a gas tax holiday this summer. Hillary Clinton and John McCain support the idea of lifting the 18.4-cent federal excise tax for the summer driving season, saying it will give consumers much-needed relief from soaring gas prices; Barack Obama opposes it (as does George Bush), saying his experience with a similar move in Illinois shows that the oil companies won’t pass the savings on to consumers, and it won’t encourage conservation.

I suspect that Clinton/McCain are going to win on the politics of this one. But an analysis by Michael Dobbs of the Washington Post suggests that Obama is right on the substance of the issue.:

Some economists say that a nationwide “gas tax holiday” would have even less impact on gas prices than temporary state moratoriums, such as the one passed by Illinois in 2000. “It’s basic economics,” said Leonard Burman, director of the Tax Policy Center, a non-partisan thinktank. “Gas is always in very short supply during the summer, which is why prices go up. In order to reduce the price, you would have to increase supply, but that is difficult over the short term, because the refineries cannot add capacity.”

According to James Hamilton, professor of the Economics at the University of California-San Diego, said that most of the benefits from a temporary tax moratorium would likely go to producers rather than consumers. He said that states that suspend gas taxes are able to respond to rising demand more efficiently than the country as a whole, because gasoline supplies can be easily moved from one state to another.

“Prices would certainly rise to the market-clearing level,” said Hamilton. “I would expect the price [of gas] to go back to very close to where it was before [the tax cut], in which case consumers would not see any benefit.”

Another economist, Jeffrey Perloff, of UC-Berkeley, agreed that a federal tax moratorium would likely have less impact on consumer gas prices than a state moratorium. He said his models showed that a suspension of the 18.4-cent federal tax on gasoline would likely result in a temporary 9 to 12 cent reduction in the cost of a gallon of gas to the consumer and a 6 to 9 cent reduction in wholesale prices.