Analyzing Proposed Gas Tax Holiday

Republican presidential candidate John McCain is advocating a gas tax moratorium between Memorial Day and Labor Day to help ease the burden of high gas prices. But how would a gas tax holiday work? And would it help? Leonard Burman, director of the Tax Policy Center, a non-partisan think tank, talks with Melissa Block.

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MELISSA BLOCK, host:

Here's one proposal to deal with high gas prices - a gas tax moratorium. The idea is Congress would lift the 18.4 cents per gallon federal excise tax on gasoline between Memorial Day and Labor Day. It's an idea that Republican presidential candidate John McCain is advocating, and it has recently divided the Democratic field - Hillary Clinton supports it; Barack Obama opposes it.

So how would a gas tax holiday work and would it help? That's a question we put to Leonard Burman, director of the Tax Policy Center, a non-partisan think tank here in Washington. Thanks for coming in.

Mr. LEONARD BURMAN (Director, Tax Policy Center): My pleasure.

BLOCK: And I'm trying to figure this out, if this gas tax moratorium were to go into effect, would it be as simple as, I show up at a gas station, at the pump, instead of it paying $4 a galloon, they'll say we're going to take 18 cents off the top and I pay $3.82, or if I'm trucker its actually less 24 cents per gallon?

Mr. BURMAN: I think that's the theory, but there's some pesky economics that get in the way. The main problem is that gas is always in short supply during the summer, that's why prices always go up.

As people drive more, the refiners can't produce more gasoline, it can increase imports that much. What they'd like to happen is for the price to decline by 18 cents. But if that did, a lot of people would decide to take vacations by car instead of flying, there'd be a lot more gasoline consumption and there's no place to get it from.

So the only way the market can resolve that conflict is by pushing the prices back up. And most people think that what would happen is the prices would stay very close to where they would be absent the gas hike holiday. So the government would be losing $10 billion of revenue, refiners would be richer, but it would have very little effect on consumers bottom line.

BLOCK: I've read a blog post that you wrote about this, headlined, "What were they thinking?" And I gather from what you're saying, you think this is a lousy idea. Why?

Mr. BURMAN: Oh, it's just terrible economics. Even if you wanted to pander the voters, that's what this sounds like, it won't lower the price because supply can't respond enough to meet additional demand. But Congress isn't going to enact this before Memorial Day; it's less than a month away. It wouldn't be a good idea even if it would lower the price because in other contexts at least all of these candidates have recognized that we've got this global warming problem. We shouldn't be burning more fossil fuels. And it would be a nightmare for the IRS to administer, they'd have to turn off the tax in May, turn it back on in September, and it would be difficult for the refiners and wholesalers.

BLOCK: The money that the federal government brings in through the federal excise tax on gasoline, where does it go?

Mr. BURMAN: It goes into the highway trust fund. It pays for investments in infrastructure, which are things like bridges and highways. And some critics of the gas tax holiday have said that, well, we need that money there, make sure that we don't have more bridges collapsing, as happened in Minneapolis last year.

The candidates, I think, have both said that they would make up the lost revenue from other sources. But given that we're going to be experiencing record budget deficits this year, creating another $10 billion hole in the budget doesn't seem like a great idea.

BLOCK: Hillary Clinton, I think says you would fill in that gap with the windfall profits tax on oil companies.

Mr. BURMAN: Yes, the windfall profits tax has been tried before. It's not a bad idea in theory; the oil companies will be making enormous amounts of money because prices are so abnormally high. The problem is implementing that is a challenge. You've got to determine what the windfall profits are, the extraordinary profits over and above what they need to operate. And the concern among some critics is that a windfall profits tax would actually discourage oil companies from doing more exploration or producing more fuel over the long term.

Mr. BURMAN: It was put in place over a temporary basis; it probably wouldn't make that much difference. But over the long term, the windfall profits tax was not considered to be a great success the last time it was tried.

BLOCK: Leonard Burman, thanks very much.

Mr. BURMAN: My pleasure.

BLOCK: Leonard Burman is director of the Tax Policy Center here in Washington.

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Gas Prices Continue Climbing

The cost of gas reached a new high on Tuesday, escalating to a national average of $3.51 per gallon — almost 66 cents higher than the price a year ago. The sharp rise has been driven, in part, by the increase in the cost of crude oil, now near $120, and the declining value of the dollar.

The sticker shock may not end soon. Here's a guide to what's going on at the pump.

What's driving up prices now?

The falling dollar, the transformation of commodity markets into financial markets and steady global demand for oil are all contributing factors, says Mark Zandi, chief economist for Moody's Economy.com and an economic adviser to Republican Sen. John McCain's presidential campaign.

"Given the turmoil in the credit markets, investors are turning to commodities and oil as a trading vehicle," Zandi explains. "It doesn't take a whole lot of money" flowing out of the bond or stock market and into oil or natural gas to drive up prices.

Typically during a recession in the United States, demand for oil falls because people make a conscious decision to drive less. But any decline in U.S. fuel consumption has been offset by greater demand for all kinds of fuel in emerging economies, which Zandi says are doing well and therefore contributing to the price escalation.

Strong global demand is likely to increase, not decrease, pressure on U.S. gas and oil prices. "China, India and other developing countries [that] are developing their economies –and a middle class — just keep putting more pressure on the supply of crude oil to turn into energy for themselves," says Jim Boyd, vice chairman of the California Energy Commission.

Is there any chance prices will fall soon?

No. Gas prices are rising quickly. At the beginning of the year, a gallon cost $3. Analysts and economists view the rise to more than $3.50 as a step along the way to prices that may exceed $4.

Is any relief coming?

Last week in Congress, Sen. John McCain proposed suspending the federal gas tax between Memorial Day and Labor Day this year as a measure of relief for consumers during the height of the driving season. The federal tax is 18.4 cents per gallon of gas and 24.4 cents per gallon of diesel.

The question to ask about such plans, says Billy Pizer, an economist with the Washington, D.C., think tank Resources for the Future, is how much of the money will flow into the hands of consumers versus corporations.

Some economists say that suspending the tax will only promote greater consumption and drive prices up — sending more money to oil producers, not consumers.

Are Americans feeling particularly squeezed because oil is priced in dollars and our currency is weak?

Zandi says the downturn in the U.S. economy, which he believes is in a recession, is taking a toll in a variety of ways.

"Nothing is going right for consumers in particular," says Zandi. "We're losing jobs, the stock market is down. House prices are falling. Gas and food prices are rising. It's all very debilitating, so the higher gas prices hurt more in that kind of context."

Will prices drop once the summer driving season ends?

After summer, gas prices typically do fall — but it depends on the price of crude oil, economists say. In the fall, the problem may shift – especially for consumers in colder U.S. regions —to increased costs for heating homes.

The Southeast, with a larger concentration of lower-income households, is typically hardest hit by rising gas and oil prices because residents spend proportionately more on energy, says Zandi.

Will we ever return to gas at $2 a gallon?

It's unlikely, especially in the near term.

"Every penny increase in the gasoline costs the American consumer $1 billion annually," says Zandi. "If we go from $3 to $4 that means $100 billion in extra cost."

Will the current pricing scenario hasten the use and development of new fuels and vehicles?

As more consumers feel pinched at the pump, their discomfort may spark individual and corporate action. "High prices in the market create responses on both the supply and demand side for fuel," says Pizer. This translates into consumers trying to save gas by driving less or searching for cars with higher fuel economy, he says. On the supply side, companies may turn to conventional sources for fuel that were not profitable in the past because they were difficult to obtain, unconventional sources that may have higher production costs or alternative fuels, he explains.

"I do feel sorry for the American consumer," says Boyd. "We've predicated our lifestyle on almost the God-given right to cheap gasoline. It's a rude awakening — a permanent awakening — we've got to have a mixed portfolio of transportation fuels. And we have to have more efficient motor vehicles."

Why are gas prices higher in California?

Since the early 1990s, to comply with federal law and its own stringent air quality standards, California has produced and utilized a different blend of gas that is more costly to produce. On Tuesday, the California retail price was $3.86, according to the California Energy Commission — 35 cents higher than the national average. Boyd attributes a third of the price difference to production costs. The remainder, he says, is because demand exceeds supply.

Material from The Associated Press was used in this report.

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