Better for Politicians than Consumers

Published July 1, 2008

Tax holidays rarely confer the full value of the tax cut to consumers, says Jonathan Williams, an economist and director of the Tax and Fiscal Policy Task Force of the American Legislative Exchange Council, a nonpartisan organization whose membership includes more than 2,000 state lawmakers.

Instead, said Williams, during tax holidays prices tend to remain the same, while the suppliers tend to increase their profits.

“The only way a gas tax holiday will cut prices by the full amount [of the tax cut] is by forcing down prices with old-fashioned price controls,” Williams said. “And anybody old enough to remember the gas lines and shortages of the 1970s knows how well that’s likely to work.”

In addition, Williams notes, price controls can have consequences beyond long lines and shortages.

Bureaucratic Meddling

“Making tax holidays work often requires costly enforcement bureaucracies and legal threats to station owners,” Williams said. “Not only is that unfair to mom-and-pop businesses, but it puts an economic drag on their efficiency–certainly not helping any to bring down prices.”

He cited Georgia’s gas tax holiday, passed in the wake of Hurricane Katrina in 2005. “It tried to crank down gas prices by forcing stations to ‘pass on’ the full value of the holiday. Failure to set the right price–as determined by politics, not good economics–constituted an ‘unfair or deceptive act or practice’ punishable under Georgia’s ‘Fair Business Practices Act’,” Williams noted.

Williams said legislators use the idea of tax holidays as a way to pander to voters by indicating an interest in dealing with high gas prices without enacting policies that would actually solve the problem.

“The real problem with tax holidays is that they let elected officials off the hook too easily,” Williams said. “Holidays distract attention from types of tax relief that are politically more difficult to enact but far more beneficial to taxpayers and the economy. If consumers are hurting, why help them for just one month? Why not give a break on everything, with an across-the-board tax cut?

“Or better yet,” Williams said, “why not trim wasteful pork spending from transportation budgets–which are funded by gas taxes–and pass on the savings as permanent tax relief?

“Gas tax holidays make a great sound bite for lawmakers, but they’re lousy tax policy,” Williams continued. “They’re one of the rare tax breaks we should do without.”

‘Windfall’ Tax Failures

Windfall profits taxes also have failed to lower gas prices.

“This nation’s experiment with windfall profits taxes in the 1980s proved to be economically devastating,” Williams noted. “When it was last tried, the windfall profits tax failed to raise even a fraction of the revenue forecasted, and it crippled the production of the domestic oil industry.”

Williams also pointed out that while Sen. Barack Obama (D-IL), the presumptive Democratic Party nominee for president, and some others in Congress are calling for the resurrection of a 1980s-style windfall profits tax on the oil industry, “It is important to note that America’s energy companies are already providing a ‘windfall’ of tax revenue.”

“Various proposals aimed at the oil industry have nothing to do with ‘fairness’ or righting a so-called wrong,” Williams said. “They are simply attempts by the government to abscond with additional revenue. Taking aim at profits also sets an extremely dangerous example by targeting a certain industry based on its level of success.”