NWA Times 10 May 2008
Gasoline tax madness
Presidential candidate John McCain recently uttered one of the year's worst ideas, a "spherically stupid" idea--stupid no matter which way you look at it. To my dismay, Hillary Clinton soon picked up the same refrain.
Clinton and Barack Obama are wonderful candidates, and there's something goofy about any Democrat who would not vote happily for either one. My preference had been slightly on Clinton's side, but the McCain/Clinton scheme represents such obvious pandering that it's thrown my preference over to Obama.
The idea of which I speak is the "gasoline tax holiday". McCain and Clinton want to remove the 18.4-cent-per-gallon federal gasoline tax for the summer. Clinton would pay for it with a windfall profits tax on oil companies, while McCain wouldn't pay for it. Obama calls the measure a "short-term gimmick" that would be ineffective and would ultimately raise the price of gasoline. He's right.
It's fairly small potatoes. You can do the math: A typical American driver drives 1000 miles per month. So at 27 miles per gallon, an 18¢ per gallon gasoline tax holiday for three months saves each driver $20. Although it's small, it's significant for what it says about the candidates and their opinions of voters' intelligence.
For gasoline consumers, this scheme won't reduce pump prices. At today's $3.60 per gallon, consumers are using the entire supply of gasoline produced. If we drop the tax by 18¢, oil companies will promptly raise their prices by 18¢ because they know they can sell their entire supply at $3.60. If oil companies don't raise their prices, the 18¢ drop in prices will, according to research on the price elasticity of gasoline, increase demand by one percent, causing shortages and gas station queues, and soon pushing prices back to $3.60, putting that 18¢ into the oil barons' pockets instead of into the U.S. Treasury. We'll see the underlying reasons for this below.
For those who like good roads, the gasoline-tax holiday blows a big hole in the highway budget. Each cent of gasoline tax brings about $2 billion per year into federal coffers, so the 18¢ tax for 3 months brings in $9 billion. The highway budget will lose this amount. Clinton would recoup this money with a tax on oil companies, but there's little likelihood Congress would pass such a tax.
For those who want high employment, this plan threatens over 300,000 jobs that could be lost due to the reduction in highway funds.
For those who want to improve U.S. resource security by reducing oil imports, this plan works in precisely the opposite direction. To the extent that the plan actually does temporarily reduce prices, it will increase demand for gasoline and increase oil imports.
And for those who care about the environment, the plan increases global warming and other car-caused damage because it increases gasoline consumption.
The reality is that there is no easy way to reduce gasoline prices. As long as we maintain our colossal consumption, while nations such as China and India continue increasing their consumption, prices will continue to $4, then $5, and then higher.
The reason is simply that demand keeps increasing while supply is now constrained because production of "easy" oil has leveled and is decreasing in many countries. For evidence that prices will remain high, consider oil giants such as Brazil's Petroleo Brasileiro SA which is betting that oil will remain above $120 per barrel. The company is drilling six miles (32,000 feet, as far down as international jet flights are up) below the ocean surface, through a mile of salt whose temperatures and pressures can melt practically every solid material, in the world's most challenging offshore oil project. The project might yield 8 billion barrels of oil--enough for three months of world consumption. Oil companies are spending a pretty penny to scrape the bottom of the oil barrel for each additional three months of supply. There is little prospect of prices ever receding, and every prospect of rapid increases. Political leaders, including Northwest Arkansas leaders such as the Northwest Arkansas Council, are not paying attention to this fundamental reality.
We already pay dearly for our cars, about $8000 per year for the average U.S. driver. That's a lot. If, at age 20, instead of buying a car you invested that $8000 every year at a modest 8 percent annual return, you would be able to retire ten years early, at age 55, with a $1.5 million bankroll simply from this investment.
We pay dearly in other ways. It's clear by now that ethanol made from food crops is driving up food prices and that this is starving people all over the world, just so we can fuel our automobiles!
The best solution is Al Gore's proposal to switch America's payroll taxes to carbon taxes, thus taxing something we want to discourage (carbon burning) instead of something we want to encourage (labor). This would raise gasoline's price by several dollars per gallon. Such a tax, justified by gasoline's enormous "externalities" (global warming, first and foremost), would reduce demand, reduce price escalation, and put the money we are currently paying to oil barons into the U.S. treasury where it could be re-distributed to Americans and spent on such high-return transportation infrastructure as trains, buses, bikeways, and sidewalks. Furthermore, by reducing income taxes Gore's proposal would put money in American's pockets.
The gasoline tax holiday proposal is a small item but it carries a big message about the integrity and the wisdom of the candidates. McCain and Clinton are either pandering for votes, or they are awfully foolish about energy issues.