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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Analyzing Proposed Gas Tax Holiday

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Analyzing Proposed Gas Tax Holiday

Analyzing Proposed Gas Tax Holiday

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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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