Apr 29 2008

Obama vs. McCain and Clinton on gas tax relief

As Clinton Seeks Gas Tax Break for Summer, Obama Says No – New York Times

Times are tough for American consumers. Rising food and fuel prices have increased the proportion of household incomes that must be allocated towards these two necessities, both for which demand is highly inelastic, meaning that as their prices rise, the quantity demanded by consumers remains relatively high.

In response to the pinching of Americans’ pocketbooks, two presidential candidates are advocating action at the federal level.

Senator Hillary Rodham Clinton lined up with Senator John McCain, the presumptive Republican nominee for president, in endorsing a plan to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for the summer travel season.

Sounds like a good idea, right? If Americans are finding it burdensome to pay more at the pump, and the government can do something to relieve that burden, why shouldn’t they do it?

Let’s do a little calculation here: At 18.4 cents per gallon, how much per fill-up will Americans save?

I drive a ’94 Toyota pick-up, has a 15 gallon tank and gets notoriously poor mileage. I’ll save $2.76 per tank of gas I buy. I usually fill up my truck about once a week during the summer, meaning I’ll save that much each week. McCain wants to suspend the gas tax from Memorial Day until Labor Day, or for a total of about 12 weeks. If Clinton and McCain get their way, I could very well save as much as $33.12 this year! ASTOUNDING!! What a deal for Americans!

Clearly, repealing the gas tax will have only a minor impact on disposable incomes in America. Obama seems to understand this better than the other candidates:

Senator Barack Obama, Mrs. Clinton’s Democratic rival, spoke out firmly against the proposal, saying it would save consumers little and do nothing to curtail oil consumption and imports…

Mr. Obama derided the McCain-Clinton idea of a federal tax holiday as a “short-term, quick-fix” proposal that would do more harm than good, and said the money, which is earmarked for the federal highway trust fund, is badly needed to maintain the nation’s roads and bridges.

The decision to suspend or not suspend federal gas taxes is essentially a cost-benefit decision. The benefit? Well, apparently around $30 per driver, or about half a tank of gas, compliments of the US government. The cost? Read on…

The highway trust fund that the gas tax finances provides money to states and local governments to pay for road and bridge construction, repair and maintenance. Mr. McCain and Mrs. Clinton propose to suspend the tax from Memorial Day to Labor Day, the peak driving season, which would lower tax receipts by roughly $9 billion and potentially cost 300,000 highway construction jobs, according to state highway officials.

There you have it; $9 billion dollars and hundreds of thousands of jobs that won’t be created in order to put half a tank of gas in each American’s car, which if you think about it, will only lead to Americans driving more this summer. Repealing the gas tax may actually induce Americans who weren’t planning road trips to go ahead and take one, increasing the overall demand for gas and driving the price up to the level it would have been with the tax.

And what about the much needed government revenue the tax creates? Hillary has another plan for recouping that loss:

Mrs. Clinton would replace that money with the new tax on oil company profits, an idea that has been kicking around Congress for several years but has not been enacted into law. Mr. McCain would divert tax revenue from other sources to make the highway trust fund whole.

Clearly, Mrs. Clinton needs a refresher course in basic microeconomics. If she had paid attention in AP Economics (did she even take AP Econ?), Clinton would know that a tax on producers of a highly inelastic good such as oil can be passed almost entirely onto the consumers. In this case, the oil companies, when faced with additional federal taxes on profits, will respond by restricting output, which reduces overall supply in oil market, raising the price of the main input for gasoline. Higher input costs for gasoline refineries will reduce overall supply of gasoline, increasing the price paid by consumers at the pump, negating any price-reduction induced by the suspension of the gas tax.

Ultimately, all taxes are borne by the consumers of an inelastic product: gasoline in this case. Whether the tax is levied on drivers directly, or the oil companies “upstream” in the production process, the outcome is the same: supply is restricted and price is higher.

The suspension of a gas tax that only costs Americans $30 over 3 months appears to impose a much greater cost to society than benefit. At least Obama seems to understand the basic economic reasoning behind this fact.

Obama on State Gas Tax Suspension

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

9 responses so far

9 Responses to “Obama vs. McCain and Clinton on gas tax relief”

  1. Chris Seahon 29 Apr 2008 at 6:27 pm

    As much as I take issue with Obama, I have to agree with him on this issue. Solving a minor problem (if it is a problem) at great expense to the nation is silly, and makes it unsurprising that the US is hundreds of billions of dollars in debt. The potential gains from putting the money to good use far outweigh the negative externalities associated with encouraging people to drive. The simple math is too compelling to ignore; perhaps Clinton and McCain are simply pandering to the masses in an indirect $33* bribe to get their vote.

    *Value may change depending on fuel capacity and efficiency of vehicle.

  2. Alex Goldmanon 29 Apr 2008 at 7:42 pm

    Once again we see politicians advertising economic policies (irresponsibly so) to garner votes as the elections grow near. If almost anyone in a high school AP Econ class can pick apart this specious policy then we either need new policies, or new politicians.

  3. calebon 29 Apr 2008 at 10:00 pm

    Lets just all ride bicycles! ^ ^ v

    Okay no really though. Lets do it, but if we can't I say we still don't vote for Obama, and smash McCain and Clinton's ideas. I agree with Alex, if we can't get new policies, we should get new politicians. Obama can point out all the negative extranalities related to a hold on gas prices, but what would be his counter response?

  4. Jonathan Lauon 29 Apr 2008 at 10:02 pm

    Wow, Clinton clearly got owned owned on this issue. She probably assumed that if her audience had heard a tax relief on gas, that it would sound appealing and garner her more votes in the upcoming election. Either that or she clearly does not understand the basic principals of microeconomics, like Mr. Welker pointed out. On the other hand, Obama looked at the bigger picture and saw all the negative effects that could happen as a result of the tax relief. In this case, it does not seem that the marginal benefits of reducing tax on gas outweights the marginal costs.

  5. Cassy Changon 30 Apr 2008 at 12:28 am

    I'd just like to express my disgust at political strategies that bluff the public. The sad part is, many people buy into it…if only more people knew some econ logics…

  6. Howard Jingon 30 Apr 2008 at 12:59 am

    Hooray for pandering to the masses!

    I don't really have much experience in living in the US outside of New York, but is there any reason why mass transit is not as prevalent in other parts of the country? It is much more fuel efficient per person, and you only have to pay $2 a ride so its cheaper to boot. There is no real reason to own a car if you live in the city; in fact most of my friends don't even have driving licenses.

    Why don't other cities in the US have efficient mass transit systems (at least in high population density areas), and if they do, why aren't more people taking advantage of them?

  7. David Granon 01 May 2008 at 9:13 am

    Looks like Obama is making an issue out of this, which is a good thing. Maybe this election can be about 'the issues' after all. Here's his commercial:


  8. kyle stevenson 01 May 2008 at 10:48 am

    Great points. Here is the scary thought, the politicians who endorse this idea gain public support. Anyone seen any polls regarding public support of this high uneducated idea?

  9. Drew Venkatramanon 04 May 2008 at 6:14 pm

    I think Obama finally has something to go on. (I'm personally tired of hearing about Pastor Wright). However, I don't necessarily know how good of an idea this is. I think that a hold on gas prices would be a bad idea. If we want to save the environment and conserve gas we should just let the prices be themselves.