Politics & Policy

McCain-Clinton 2008

A taxing holiday from reality.

John McCain’s idea — now embraced enthusiastically by Hillary Clinton — to temporarily suspend the federal gasoline tax between Memorial Day and Labor Day is rich fodder for energy analysts. Even richer, however, is the somewhat curious response that the proposed “tax holiday” has provoked from political actors and policy pundits of various stripes. A quick tour of the issues in play is instructive.

First, if there is any math out there to refute Barack Obama’s claim that the proposed tax holiday would save the average driver a grand sum of $28 — “otherwise known as $9 a month” as he puts it, or the grand sum of one-half of a tank of gas — it has escaped our attention. Of course, even that calculation presupposes that service station owners will pass on the full tax cut to the consumer — which they most definitely would not. How much of that tax cut would reach consumers is unclear. What is clear, however, is that Sen. McCain’s claim that the tax holiday would provide a powerful stimulus to the economy is risible. Sen. Clinton’s claim that the savings represents “real money” to the poor, hard-trodden masses yearning to keep their heads above water is similarly hard to swallow.

#ad#Second, the McCain/Clinton plan is directly at odds with other stated policy objectives forwarded by McCain/Clinton. Both candidates, for instance, dutifully call for the government to do more to promote energy conservation, reduce greenhouse gas emissions, encourage renewable energy, and to break our national “addiction to oil.” And they hope to do this by . . . reducing gasoline prices?

Consider the McCain-Lieberman bill to reduce greenhouse gas emissions by one-third below 2000 levels by 2050. The EPA estimates that the bill would increase gasoline prices 26 cents per gallon in current dollars by 2030 and 68 cents per gallon by 2050. Electricity bills would likewise go up by 22 percent in 2030 and 25 percent in 2050. So what John McCain proposes to give with one hand will be taken — in spades! — by the other.

Hillary Clinton’s two-handed policy is even more striking. Her big complaint with McCain-Lieberman is that it doesn’t go far enough. Tie the tax holiday with a windfall profits tax, however, and the tension between the various aspects of the McCain/Clinton energy agenda disappears. That’s Hillary Clinton’s plan; replace the lost revenues from the tax holiday with a windfall profits tax on “big oil” and tell the voters that you’ll make the oil companies pay their gasoline taxes for a while. What she doesn’t tell her adoring working-class fans is that a windfall tax will send oil prices up, not down. That’s the conclusion of the only analysis of the economic impact of that tax that we are aware of — written by Salvatore Lazzari of the Congressional Research Service — which found that the 1980 windfall-profits tax reduced domestic oil production by 3-6 percent, a result that should come as no surprise.

But even that result probably understates the long-term effect. Some analysts regurgitate the standard textbook line that a one-time, lump-sum tax on windfall profits shouldn’t alter market conditions. But once such a tax is imposed, who’s to guarantee that it won’t be imposed again? The effect of the windfall profits tax (repealed in 1988) is almost certainly still with us because domestic producers are forced to consider the possibility that new windfall profit taxes will be imposed in the future. Hence, some subset of otherwise profitable investments in domestic production are never made because the possibility of a new windfall profit tax tips the balance against the investment.

Gall over the manifest hypocrisy of these two candidates, however, does not explain the vicious response the tax holiday has received from pundits and public intellectuals. No, their anger largely stems from outrage over the public betrayal of the case for high-energy prices. That case, however, is as dubious as the case for a tax holiday.

Some pundits argue that the feds need to discourage oil consumption — and thus increase fuel taxes — to reduce the flow of money going to Islamic terrorists. There is no correlation, however, between world oil prices (and thus, oil profits) and Islamic terrorism. Even when crude oil prices were in the $20s per barrel, al-Qaeda, Hezbollah, and Hamas were doing quite nicely and statistical analysis concretely demonstrates that terrorism does not correlate with oil revenues.

Others argue that we need higher gasoline prices to internalize the costs associated with climate change. That argument sounds correct, but no one has convincingly established the correct premium on the price of gas that would yield the appropriate degree of conservation. Such a task is understandably difficult, if not impossible. But a probable “market failure” in gasoline production and consumption does not guarantee “government success” in attempting to correct it via a gas excise tax. Indeed, the more we hear on this from our current crop of presidential candidates, the more afraid we are of an eventual “government failure” that’s worse.

On balance the greater danger is that, once elected, any one of the remaining presidential candidates will increase, not reduce, the gas tax. And, as appears likely, devoting the additional revenues to the highway trust fund would extend the current confused government policy: Building and maintaining roads and highways with revenues from a gas conservation tax promotes more, not less driving and gas consumption by the public.

The gas tax cannot do both — serve as a stick to promote gas conservation for slowing global warming and as a carrot to provide an economic boost for families in trouble. That’s the reality, but everyone seems intent on taking a holiday from it.

– Jerry Taylor and Jagadeesh Gokhale are senior fellows at the Cato Institute.

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