Gas Tax Holiday Splits Clinton And Obama: Who's Right?

Gas Tax Holiday Splits Clinton And Obama: Who's Right?

(4/30: Updated with new statements)

With just days before the next set of Democratic primaries, the idea of a summer "gas tax holiday" is working its way to the economic forefront, and become a rare flashpoint of policy disagreement between Sens. Hillary Clinton and Barack Obama.

Clinton has suggested suspending the 18.4 cent-per-gallon tax on gasoline, while Obama has attacked the idea as political pandering. But the merits of the idea haven't received much evaluation on the stump.

To fund her plan, Clinton has suggested taxing oil companies (Sen. John McCain has also advocated a suspension of the gas tax, but without the same funding mechanism). From her gas tax policy announcement:

Hillary will impose a windfall profits tax on oil companies and use the money to temporarily suspend the 18.4 cent per gallon federal gas tax and the 24.4 cent per gallon diesel tax during the upcoming peak summer driving months.

Obama responded harshly to the idea that suspending the gas tax would help Americans pay their bills:

Now, the two Washington candidates in the race have been attacking me lately because I don't support their idea of a gas tax holiday. This is an idea that, when all is said and done, will save you - at most - half a tank of gas over the course of the entire summer. That's about $28. It's an idea that some economists think might actually raise gas prices. And without a plan to pay for it right away, it means that the money would come directly out of the fund we use to pay for construction projects, which could cost the state of North Carolina up to 7,000 jobs.

This is the problem with Washington. We are facing a situation where oil prices could hit $200 a barrel. Oil companies like Shell and BP just reported record profits for the quarter. And we're arguing over a gimmick that would save you half a tank of gas over the course of the entire summer so that everyone in Washington can pat themselves on the back and say that they did something.

Clinton continues to make an issue of this policy difference, both on the stump and in a new television ad in Indiana:

"My opponent, Senator Obama, opposes giving consumers a break," Clinton said, campaigning in North Carolina. "I understand the American people need some relief."

Politics aside, who is right? Is a gas tax holiday a good idea?

A roundup of arguments for and against finds that most policy analysts believe a suspension of the gas tax is at best ineffectual, and at worst, counterproductive. (If you see any additional analysis pro or con, email us and we'll add it.)


Sen. Chuck Schumer (Clinton supporter):

Shell earned $9 billion, BP earned $7.6 billion and we ask to know on whose side is the President? Which side is he on? You can't be on both. You can't be both for big oil and for lower prices. And we believe that things have to change. Some have argued for a gas tax holiday. But they don't want the oil companies to pay for it. And that means we won't build our highways. We believe that there ought to be a gas tax holiday, but big oil ought to pay for it. Take some of the money out of the royalties, take some of the money out of the windfall profits and reduce that gas tax. It's that simple.


Tom Friedman (NYT columnist)

It is great to see that we finally have some national unity on energy policy. Unfortunately, the unifying idea is so ridiculous, so unworthy of the people aspiring to lead our nation, it takes your breath away. Hillary Clinton has decided to line up with John McCain in pushing to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for this summer's travel season. This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks. What a way to build our country.

Jonathan Alter (Newsweek columnist)

It will cost the U.S. Treasury at least $8.5 billion and probably much more, according to state highway officials. For McCain that's no money at all--merely one month in Iraq. For Clinton it's money she's already spent. She has said in the past that any proceeds from a windfall profits tax would go for renewable energy. The $8.5 billion figure assumes the tax would be reapplied after Labor Day. Fat chance. The one-year costs are probably closer to $30 billion.

Greg Mankiw (former Bush economic adviser)

"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."

Jonah Gelbach (Obama supporter)

One point that has gone largely unreported in the regular media is that a brief gas tax holiday would likely do little to reduce prices for consumers simply because in the short run the supply of gasoline is relatively fixed (in econese, the short run supply curve is close to vertical). As a result, a cut in the gas tax of brief duration will simply cause the pre-tax price of gas to rise. This would mean that the price paid by consumers would change relatively little, if at all (tho James Hamilton's post, linked below, suggests the consumer price might fall by as much as half the gas tax, which I think would be about 9 cents). Instead, the price received by oil companies would simply rise, providing them with windfall profits."

Federico Peña (former Clinton energy secretary, Obama supporter)

"Today we're seeing another example of Washington politics at its worst. Senator Clinton is running TV ads and launching repeated attacks on Barack Obama for not supporting the gas tax holiday she's supporting, but today her own aides told the Washington Post that they know that this is a questionable plan and that they are using it to make it appear they're against big oil. The Clinton gas tax gimmick does little to reduce our dependence on foreign oil and will actually increase oil prices. It is the kind of pandering that insults people's intelligence. With energy prices skyrocketing, we're looking for real solutions--not political posturing to get elected."

Robert Reich (Obama supporter)

So what else can we do? McCain and HRC are proposing a tax holiday on gas - so this summer you wouldn't pay the 18 cents a gallon that would otherwise go to Uncle Sam. Talk about dumb ideas. This will only encourage Americans to drive more, thereby increasing demand and causing gas prices to rise even higher. Driving more will also put more carbon dioxide into the atmosphere, which fuels global warming. And this will cost taxpayers some $10 billion. It's a cheap political gimmick that does nothing to stem the rising price of oil.

Paul Krugman (NYT columnist)

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.

The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it's pointless, not evil. But it is pointless, and disappointing.

Len Burman (Tax Policy Center)

For a moment, forget about whether encouraging fossil fuel burning makes sense during a time of global warming, whether we should raid the highway trust fund when bridges are collapsing for lack of maintenance, or the disconnect between the proposal to cut gasoline taxes and the candidates' endorsement of "cap-and-trade" limits that would raise gasoline prices.

Even in this alternative reality, there's a problem. Refiners run near capacity every summer as families rack up miles on family vacations. That's one reason why gas prices jump in the summer. If McCain's excise tax cut translated into lower prices, we'd all want to drive more, which would push up the demand for gasoline. Since the refiners can't produce much more without building new refineries, the price has to go back up.

The nation's roads and bridges are already overburdened and any "gas tax holiday" -- including the one proposed by Sen. Hillary Clinton -- would only delay much needed transportation projects the American Society of Civil Engineers said today. A moratorium on the gas tax poses a significant threat to the U.S. economy, and could potentially increase the cost per driver caused by traffic congestion and poor road conditions. It will provide no tangible benefit to the American people, and any plan for restoring the $8.5 billion in lost transportation funding is unlikely.

James Hamilton (Economist, UC San Diego)

"I don't think that a gas-tax cut would result in a really big drop in gasoline prices," said James Hamilton, a professor of economics at the University of California San Diego. It's simple economics: Without a corresponding increase in supply, he added, the price would rise again.

Lawrence Goldstein (Energy Policy Research Foundation)

"You don't want to stimulate consumption," said Lawrence Goldstein, an economist at the Energy Policy Research Foundation. "The signal you want to send is the opposite one. Politicians should say that conservation is where people's mindset ought to be."

Lee Schipper (Visiting scholar, UC-Davis)

"Higher demand just pushes the world price a bit higher, giving a sizable share of the tax refund to oil producers," said Lee Schipper, an energy expert and a visiting scholar at the University of California at Berkeley.

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