Politics vs. Economics: The Summer Gas Tax Break and the 3 Candidates

Virtually no prominent economists support this idea, but it does have strong political support from some people. So, who is on the side of sound economics and who is willing to enact foolish policies to gain a few votes? The answer may surprise you.

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http://www.nytimes.com/2008/04/29/u...ssuserland&emc=rss&pagewanted=all&oref=slogin

Democrats Divided Over Gas Tax Break

WASHINGTON — As angry truckers encircled the Capitol in a horn-blaring caravan and consumers across the country agonized over $60 fill-ups, the issue of high fuel prices flared on the campaign trail on Monday, sharply dividing the two Democratic candidates.

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. But 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.

While Mr. Obama’s view is shared by environmentalists and many independent energy analysts, his position allowed Mrs. Clinton to draw a contrast with her opponent in appealing to the hard-hit middle-class families and older Americans who have proven to be the bedrock of her support. She has accused Mr. Obama of being out of touch with ordinary Americans who are struggling to meet their mortgages and gas up their cars and trucks.

Mrs. Clinton said at a rally on Monday morning in Graham, N.C., that she would introduce legislation to impose a windfall-profits tax on oil companies and use the revenue to suspend the gasoline tax temporarily.

“At the heart of my approach is a simple belief,” Mrs. Clinton said. “Middle-class families are paying too much and oil companies aren’t paying their fair share to help us solve the problems at the pump.”

The split occurred as Senators Clinton and Obama were competing intensely in primaries in Indiana and North Carolina, where voters go to the polls next Tuesday. Opinion surveys have shown that the faltering economy and high gas prices are the top concerns of voters across the country, edging out the war in Iraq.

The Clinton campaign is running television advertising in Indiana contrasting her approach on gas prices with Mr. Obama’s.

Mrs. Clinton said the tax on the oil companies, which have been reporting record profits as oil prices soar, would cover all of the lost revenue from the federal tax on gasoline and diesel fuel. She also said no highway projects would suffer.

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.

In 2000, Mr. Obama supported a bill in the Illinois legislature to suspend most of the state’s 6.25 percent gasoline sales tax. But he later opposed making the reduction permanent, arguing that the state needed the revenue and that the measure had saved consumers little.

Mrs. Clinton, of New York, has also taken varying stands on the issue of gas taxes. In her 2000 Senate campaign, she spoke against repealing the federal gasoline tax, calling it “one of those few taxes that New York actually gets more money from Washington than we send.”

At a meeting with voters in North Carolina on Monday, Mr. Obama said lifting the gas tax for three months would save the average consumer no more than $30, a figure confirmed by Congressional analysts. Mr. Obama has previously dismissed Mr. McCain’s proposal as a “scheme.”

“Half a tank of gas,” Mr. Obama told his audience. “That’s his big solution.”

President Bush’s spokeswoman essentially sided with Mr. Obama in saying that tax holidays and new levies on oil companies would not address the long-term problems of dependence on foreign oil.

Dana Perino, the White House spokeswoman, said gasoline prices were “entirely too high, but I think it would be disingenuous and unfortunate for American consumers for them to be led to believe that there is a short-term fix.”

“There is not going to be one,” Ms. Perino said.

It is not clear whether Congress will act quickly on a fuel tax suspension and a new levy on oil companies, particularly given the White House opposition. While Democratic leaders are sympathetic, aides said, similar plans have failed a number of times.

The debate erupted as both candidates rounded up more superdelegate endorsements on Monday, with Mr. Obama highlighting the backing of Senator Jeff Bingaman of New Mexico, who is the chairman of the Senate Energy and Natural Resources Committee, while Gov. Michael F. Easley of North Carolina was preparing to endorse Mrs. Clinton on Tuesday.

The split on the gas tax is a relatively rare one for Mrs. Clinton and Mr. Obama, who agree on the broad outlines of policy in most areas. They have both called for the suspension of purchases for the national strategic petroleum stockpile, a supply of oil to protect the country against sudden supply disruptions; new taxes on oil companies; measures to curb global warming; and heavy federal spending on renewable energy sources. They have also called for a federal investigation of possible manipulation in oil markets.

Mr. McCain has also called for a halt to purchases for the petroleum reserve and expressed support of climate-change legislation, but opposes the imposition of windfall-profits taxes on oil companies.

All three candidates have endorsed tougher fuel-efficiency standards for cars and trucks and diplomatic measures to pressure oil-producing nations to lower prices.

The federal tax on motor fuels — the tax on diesel fuel is 24.4 cents a gallon — yielded $28.2 billion in 2006, the last full year for which statistics are available. The last time the federal fuel taxes were raised significantly was in 1993 as part of President Bill Clinton’s budget-balancing package.

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.

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.

The Senate blocked a $15 billion tax on oil companies last December that was part of a larger energy package.

A McCain spokesman sought to use the gas tax issue to drive a wedge between the two Democratic candidates and paint Mr. Obama as a flip-flopper given how he voted as a state lawmaker in 2000.

“It’s clear Barack Obama’s not strong enough to provide immediate relief at the pump, and it shows he doesn’t understand our economy or have the ability to deliver for hard-working Americans,” said Tucker Bounds, a McCain aide. “Senator Obama’s arguments against John McCain’s gas tax holiday are complete fiction, and the reality is that he used to support a gas tax holiday before he was running for president.”
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A short article advocating higher gas taxes (especially note the point on tax incidence):
http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html

 

Ok. I'd be interested to see why you favor that over the Pigovian tax idea here:
http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html

 

Ok, but the part I just bolded is kind of a separate issue (grants-in-aid, etc). Suppose the revenue from an oil tax just went into the federal budget in general. What would you say then? Should the tax be raised or lowered overall in that case?

 

Lower price => more consumption. What makes you feel that is the direction we need consumption to go?

I should point out, since I've mentioned "lower price", that because the supply of oil is seen as inelastic relative to demand, a decrease in taxes would probably go mainly into the pockets of the oil companies rather than causing much lower prices at the pump for consumers.

 

Um, I think he's just saying that on this issue, Obama has apparently learned the economics involved. Now he is in agreement with virtually all economists, unlike Clinton or McCain.

How does it feel to know that the GOP nominee is willing to support a clearly misguided economic policy for political gain?