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Summer Gas Tax Holiday

April 30, 2008 - by Donny Shaw

John McCain (R-AZ) recently gained a surprising ally for his gas tax holiday proposalHillary Clinton (D-NY).


>A gas tax holiday proposed by U.S. presidential hopefuls John McCain and Hillary Clinton is viewed as a bad idea by many economists and has drawn unexpected support for Clinton rival Barack Obama, who also is opposed.
>"Score one for Obama," wrote Greg Mankiw, a former chairman of President George W. Bush’s Council of Economic Advisers. “In light of the side effects associated with driving … gasoline taxes should be higher than they are, not lower.”
>Republican McCain and Democrat Clinton, who is battling Obama for their party’s nomination, both want to suspend the 18.4-cents-per-gallon federal gas tax during the peak summer driving months to ease the pain of soaring gas prices. The tax is used to fund the Highway Trust Fund that builds and maintains roads and bridges.

Economists tend to agree with Obama, even Clinton-supporting op-ed columnist Paul Krugman:

>Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.
>Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories. The McCain/Clinton gas tax proposal comes too late for that. So it’s Econ 101: the tax cut really goes to the oil companies.

Though the gas tax holiday is gaining popularity among some very influential politicians, it looks like the Democratic congressional leadership is siding with the economists on this one. House Majority Steny Hoyer (D-MD) voluntarily came out against the idea today, which suggests that the bill is probably not going to come up for a vote:

>"I believe the suspension of the tax for a short period of time would not be a policy that I would think is particularly positive," Hoyer told reporters Wednesday. “I think the oil companies or those pricing their gasoline will simply up the prices. Our people won’t save money.”

UPDATE: Clinton has introduced her own gas-tax-holiday bill – S.2971.

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