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Tuesday, May 06, 2008

McCain & Clinton Are Right About The Gas Tax Holiday

While we are waiting for the election results, let's talk about the overwhelming punditry against the gas tax holiday.

Listening to ivory tower economists and professors is not as good as populism. For instance, in this article we get the professor's opinion:
In a press release today, Joseph Doyle (right), the Jon D. Gruber Assistant Professor of Applied Economics at MIT Sloan, said that drivers hoping for a break from such proposals will likely be disappointed; gas prices would likely fall by significantly less than the full amount of the actual tax cut, assuming that the proposed tax suspensions become reality. "There is a common misperception that if a state tax of 5 percent per gallon is eliminated, then the price at the pump will fall by 5 percent," Doyle said in a statement. "In fact, our research suggests that retail gas prices drop by as little as 3 percent following the elimination of a 5 percent sales tax. Given tight supply and demand conditions, the benefits of a tax holiday are shared by station owners and consumers. For the federal excise tax, we would expect a reduction in prices at the pump on the order of 10 cents."
The key phrase here is "tight supply and demand conditions". Demand continues to fall and the decline will continue no matter what the government does, because a large component of the decline in demand is stemming from vehicle replacements, and it is a one-way phenomenon that builds year after year. The decline in demand has continued for several years now, and has placed many gas stations in situations in which they are facing strong competition. The last time gas consumption was this low was in 1996, in the middle of a mid-cycle slowdown. It was then business-led. Now it is consumer-led. Because of the competition for decreased sales, gas stations would pass on most of this to consumers. We'll call it 15 cents out of of the 18.8 cent federal gas tax.

Click on the graph above to see a larger version. The data comes from the EIA, so I don't want to hear any nonsense about me making this up. That is the best data available.

A household consuming 35 gallons of gas a week would save $5.25 a week. In a month that would amount to about $22.60 (4.3 weeks). Over 3 months that would amount to almost $70. Now I know this will shock some people, but for many families, that amounts to more than the money they have one week a month to buy food. There are tons and tons of working class families for whom this would be a significant benefit. The problem is that professors are too out of touch to understand how people are really living. I'm talking people that own homes!!!

The best thing about the gas tax reduction is that it imposes no administrative burden on the government, such as rebate checks. It is highly regressive - it benefits the tightly strapped far more.

If the government also cut the higher diesel tax, it would benefit truckers and help to control inflation, so there would be an additional benefit.

The only problem with the proposal is that it needs to be done for at least a year, but a summer break would help. It's possible that some states would follow suit by reducing or suspending their own gas taxes, and that would magnify the benefit considerably.

Consider how much it cost to mail those $600 checks. Cutting taxes is a far more efficient way to pass stimulus into the economy than rebates. Cutting regressive taxes is an even more efficient way to stimulate the economy.

Politicians need to get a grip. Inflation is cutting people to the bone, and many families are having difficulty feeding themselves. Other things that need to be done are to increase food stamp allotments and expand that program to cover more people by raising the gross and net income limits. It is totally weird and stupid for politicians to be discussing expanding government medical insurance programs when people can't afford to buy healthy food.

I'm not kidding you. I know of multiple families with incomes between 40-50K in which the adults hardly eat for one week a month in order to buy food for their kids. For people who cook with the basics, the effective inflation on food has been much higher than the average reported - more than double.

Well as mr Obama said : he is not against this because it's good or bad for the economy, or even for poor people.

HE wants to decide HIMSELF who gets money and who doesn't. He does, his wife does (got a $200.000 raise this year - coincidence ? I think not), and anyone else who'll suck his ...

You know, because that's "fair".

And in case anyone argues, as any 5 year old will gladly testify, the meaning of the word "fair" is relative.
At this point, politicians need to stop micro-managing and start macro-managing the problems that are built into the system.

Those problems include a swelling federal deficit exaggerated by both a weak economy and the first impact of the SS/Medicare disbursement surge, the energy situation, and the financial impact of the 1990s surge in financial "innovation".

If you address the big problems, the smaller problems will correct on their own. The biggest problem we have is government overspending. Since social costs are due to rise, it is time to get serious.
That $70 would be exactly what I spent out of this paycheck for food for us and it has to last two weeks. We are fortunate in that we still have bulk stuff and a friend gave us a bit more to add to it.

I am tired of people being in favor of tax cuts when it helps the "middle class", but against anything like the stimulus rebate or gas tax holiday. Are these folks so clueless that they don't understand that some local economies depend on tourism? If that tanks this summer, you will be looking at even worse unemployment figures come fall.
Me too - I mean about middle-class tax cuts, without looking at anything that can done for everyone.

You're not alone. There are probably at least 30 million households who are watching every dollar. Yesterday I went to the pharmacy to pick up a prescription. As I was walking in, an older lady (considerably older) was talking to an old man in their car. She said "I forgot those", and he said "Get the green and white ones".

When I was waiting for the prescriptions, she came up with a little thing of gum and a package of TicTacs. A lot of older people have problems with their salivary glands, and something to suck on helps. She told the girl "I think I have enough money", and I said that I had change I needed to get rid of. Well, it was $3.02, she didn't accept my offer to cover the rest, and she told the girl that she'd have to go out to the car to get more money. Needless to say she did not come back in. The change she had from the money she'd allocated for the medicine was all she could afford to spend. If she had had the money she would have accepted my offer, because this little old lady was moving slowly. But because the money meant something to her she assumed it meant something to me.

People just don't understand what has happened. The CPI numbers don't show at all the reality of many working or older people's lives. If you were living carefully to begin with, the last few years have been absolutely devastating.
Here's my problem with the gas tax holiday for what it is worth.

I happen to think cheap gasoline got us partially into this situation in the first place. First, we thought it would stay cheap. Second, we spread ourselves out (suburbia).

I'm completely in favor of helping the poor through tax rebates. I would prefer that it went directly there though and did not inspire people to drive more.
Mark, there is not a chance in hell that it will encourage people to drive more. FWIW, the factor keeping many poorer people from buying smaller vehicles is money. They don't have it to switch over.

The current levels of food and gas will keep consumers so pressured that even states dropping say 20 cents of their tax and the feds dropping all of theirs wouldn't encourage people to drive more.

US gas consumption is dropping and will continue to drop at these prices.
Mark, there is not a chance in hell that it will encourage people to drive more.

Not all people surely, but some people will. That's just the nature of a relative bargain. I agree that the overall trend is down though and I see very little in place to stop it. I'm simply suggesting that by having a gas tax holiday, consumption would be higher than without one. I'm honestly not trying to be cold hearted towards the poor. Just the opposite. I'd vastly prefer something other than a temporary bandaid.

FWIW, the factor keeping many poorer people from buying smaller vehicles is money. They don't have it to switch over.

Absolutely. I have no solution to the problem. In fact, I have very few solutions to our problems. I happen to agree with Volcker on this. The situation is "dangerous and intractable."

Picture how much better shape our country would be in right now if we never had cheap energy. We wouldn't have built so many houses so far from where we work (unlike the rest of the world). We wouldn't be driving energy inefficient cars either. Heck, we might even be walking to work instead. Who knows?

Once again, my comments are rear view mirror looking observations though. Unfortunately, I have no solutions for what's out the front window. Sigh.
I ride my bike to work (and my wife doesn't work, so she doesn't do a whole lot of driving), so for what it's worth the proposed tax break won't affect me much.

That disclaimer aside, I think any reduction in taxes is always a good thing. At the same time, I'm loathe to see government (state or federal) run more in debt for the purpose of temporary relief. It's not as if they're going to put a moratorium on spending the money they would've otherwise received from the gas tax. No, the spending will continue, and we'll be paying later for cheaper gas now.

I'm all for tax cuts, but they need to come with reduced spending and should be permanent. Otherwise it seems to me to just be a popularity gimmick.

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