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Gasoline-tax reprieve: an idea running on empty

Minimal cost savings, increased dependence on foreign oil, and high administrative costs are among reasons why this idea ran out of gas.

By David R. Francis / May 5, 2008



The small cartoon on the Tax Policy Center's website shows a man's head with a gaping hole through it and the words "Stupid Tax Trick." The words refer to the proposal by Republican Sen. John McCain to suspend the 18.4 cents per gallon federal excise tax on gasoline between Memorial Day and Labor Day.

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The presumptive Republican presidential nominee's suggestion was quickly picked up by Sen. Hillary Rodham Clinton, campaigning for the Democratic nomination. The idea, however, died a quick death in the Senate last week at the hands of a Democratic caucus drafting a bill aimed at giving relief from soaring gas prices. To many economists and others, the short tax holiday didn't make much sense.

"It's a terrible idea," says economist Eric Toter, coauthor of the article that accompanied the cartoon and was headlined, "What Were They Thinking???"

Undoubtedly, they were thinking politics. A new survey by the Kaiser Family Foundation found that paying for gasoline easily tops the list of economic woes seen by American families. Some 44 percent of those surveyed saw their gas bills as a "serious problem."

"It's out of the political pandering playbook," says Robert Bixby, executive director of the Concord Coalition, a nonpartisan organization pushing for elimination of the federal budget deficit.

Sen. Barack Obama, Senator Clinton's rival for the Democratic nomination, did reject the idea. On this issue, he's "the only one that looks like a grown-up," comments Mr. Bixby.

President Bush also disapproved. Of course, he's not running for office.

Here's why critics say the gasoline-tax holiday plan is a bad idea:

•It wouldn't save the average consumer much money. If a driver uses 10 gallons a week, he or she would save about $26 during the three months – enough to buy seven or eight milkshakes. A driver with a long commute to work would, potentially, save more. So would the truck drivers who were circling the Capitol in a horn-blaring caravan last week, angered by the 24.4 cents per gallon tax on diesel fuel.

The problem, says Mr. Toter, is that the cheaper fuel would encourage Americans to drive more – say an extra trip to the beach. The end result – after increased summer demand stretches American refining capacity to the limit – would be even higher prices.

It wouldn't "do anything" for the consumer, Toter concludes. It would just boost the already record profits of refiners and oil companies.

An econometic analysis by Jeff Perloff, an economist at the University of California, Berkeley, is not so harsh. Drivers might save 9 to 12 cents a gallon despite the rising demand, he reckons.

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