In his ranging economic speech two weeks ago, Sen. John McCain announced his support for a summer gas-tax holiday that would suspend the 18.4¢ federal gas tax and 24.4¢ diesel tax between Memorial Day and Labor Day. Sen. Hillary Clinton then jumped on the bandwagon with a slight variation; she would impose a windfall profits tax on oil companies and use the money to temporarily suspend the taxes. Barack Obama, meanwhile, rejected such proposals as nothing more than counter-productive pandering and has since been attacked by both McCain and Clinton as out of tune with the economic insecurities of the middle class.
But according to economists like Paul Krugman and Dean Baker, Obama is on the mark, as the moratorium is nothing more than a giveaway to oil companies. Baker explains:
Actually, almost all economists would agree that the tax cut proposed by Senators Clinton and McCain would save consumers nothing. With the supply of gas largely fixed by the capacity of the oil industry (they claim to be running their refineries at full capacity), the price will not change in response to the elimination of the tax. The only difference will be that money that used to go to the government in tax revenues will instead go to the oil industry as higher profits.
Want some more proof of the plan's short-sightedness? Illinois actually instituted a six-month gas moratorium in 2000, one that Obama voted for as a state senator but now regrets. The results weren't pretty, as The Washington Post reports:
The moratorium proved politically popular in Illinois, but economically questionable. The Illinois Economic and Fiscal Commission estimated that the state lost $175 million in revenue during the six-month period. A subsequent study by the National Bureau of Economic Research showed that gas prices fell by an average of 3 percent while the moratorium was in effect, meaning that only 60 percent of the savings from reduced taxes was passed on to consumers.
"It turned out to have a pretty small effect," said Joseph Doyle, an assistant professor of economics at the Massachusetts Institute of Technology. "Consumers were slightly better off, but the benefits were spread very thinly, and the government was a lot worse off."
A Chicago Tribune poll showed that only 28 percent of motorists believed that they were actually paying less for gas as a result of the suspension of the tax.
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