Rossputin.com Rational Thinking About Our World

Much political buzz lately has revolved around support by Senators Clinton and McCain, and opposition by Senator Obama, to a "federal gas tax holiday".

According to year-old data from the Department of Energy, "The average American uses 500 gallons of gasoline every year." So, the average American uses about 9.6 gallons per week. Let's round it up to 11 gallons for the summer driving season.

The federal gasoline tax is 18.4 cents per gallon. And, let's assume that if a "gas tax holiday" were implemented, it would be between Memorial Day and Labor Day, as McCain and Clinton have called for. That's a total of 98 days, or 14 weeks.

As of April 28, 2008, the average retail price across America for regular gasoline was $3.60 meaning the average driver spends just under $50 per week on gas.

If the gas tax were implemented, and making the unlikely assumption that 100% of the gas tax reduction would find its way to the price at the pump, that driver would save $2 per week, or about 5% of the total spending on gas. (More likely, only a part of the gas tax would make its way to the pump price, with the actual savings to drivers closer to $1.25 per week.) Even a liberal Democrat could not believe this amount, $2 per week, will be economically significant in terms of
consumer spending.

That said, the total amount of revenue forgone by the government would be approximately almost $8 billion. With consumer spending of $2.8 trillion estimated for the 98 days of the holiday, the gas tax savings, we're looking at Americans keeping an amount under 0.3%, and more likely under 0.2%, of their spending for that period. Again, not enough to make a difference in anyone's economic behavior.

But we can predict what will happen after the gas tax holiday is over: Federal and state governments, construction unions, and other groups with a vested interest in increasing highway spending will tell us that the highway trust fund is dangerously underfunded. We will be told that cars will be collapsing into sinkholes on interstate highways and that more bridges will collapse unless we make up the shortfall. So, Congress will propose an increase in the gas tax. It won't sound like much, maybe just 2 cents a gallon...and who will blink at 2 cents when the gas price is already over $3, but that increase is forever. In a couple of years, all the benefit of the "holiday" will have been wiped away, with gas taxes permanently higher. It's like taking a holiday to the tropics and having a great time only to come back and learn you've contracted malaria...the kind that lives with you forever even if it doesn't produce acute symptoms every day.

The "gas tax holiday" is a bad idea. It's obvious political pandering with no clear economic benefit, and a reasonable chance for it to cause problems in funding federal road and bridge maintenance. If anything, Use Taxes (i.e. you use the road, you help pay for its maintenance) are among the most fair taxes we have.

It's not surprising that one Democratic candidate would come out for it; either Obama or Clinton had to, just to try to differentiate himself or herself from the other. And it's not surprising that McCain would support it because he has admitted that he doesn't know much about economics. (I just wish he'd stop proving it so often.)

Clinton and Obama pressed the issue in Indiana, Clinton adding the twist of wanting to "take some of the windfall profits of big oil to pay to suspend the gas tax this summer" even though raising taxes on oil companies would simply boost pump prices, effectively raising taxes on all Americans who drive. Obama properly calls it a "classic Washington gimmick".

The fact that two out of three presidential candidates think the "gas tax holiday" makes good politics shows their low estimation of Americans' understanding of economics and the rule of law. But Clinton's tiny margin of victory in Indiana shows that, for once, people were not fooled by her Robin Hood costume.