Gas Tax Holidays, Windfall Profit Taxes of Doubtful Value, Analysts Conclude

Published July 1, 2008

As gasoline prices continue to climb, several state and national political leaders, including the major-party presidential contenders, have presented plans they say would ease consumers’ pain. But many economists and public policy experts have their doubts.

The presumptive Republican Party nominee, Sen. John McCain (R-AZ), and Sen. Hillary Clinton (D-NY), who sought the Democratic Party’s nomination, each proposed a federal gas tax “holiday” during the summer. Some state lawmakers have offered similar proposals.

“As for the federal gas tax ‘holiday,’ the proposals are horrible tax policy,” said Jason Mercier, director of the Center for Government Reform at the Washington Policy Center in Olympia, Washington. “Americans are unquestionably overtaxed, but the answer is not ‘holidays’ or subsidies but uniformly lowering the overall tax rates–no more tax relief winners and losers picked by government.”

‘Windfall’ Tax Also Bad

The presumptive winner of the Democratic Party’s nomination for president, Sen. Barack Obama (D-IL), by contrast, supports a windfall profits tax on oil companies. The tax would target profits being made by oil companies as a result of the increase in oil prices.

Gerald Prante, a senior economist at the Tax Foundation, says such a tax would be impractical and ineffective.

“There are many problems with a windfall profits tax,” Prante said. “First is that the person who bears the short-run burden from a tax may not even be the person who has profited from the unexpectedly high profits of the oil companies.” Increasing oil industry costs, which a new tax would do, could dampen investment in the industry, he noted, and he objected to a tax targeting a single economic sector.

“Ideally, even under a consumption tax, windfall profits properly defined would actually be taxed,” Prante said. “However, it should apply to all sectors and be a true windfall tax, although implementation is essentially impossible to perfect.”

Supply and Demand

Mercier says the candidates’ proposals are the same kinds of policies that led to high gas prices to begin with. He said the price of gas can be regulated better through market forces.

“If Congress really wants to lower gas prices, it needs to get out of the way of the market by making it easier for domestic oil exploration and production and encouraging new refinery capacity to be built,” Mercier said. “You can’t restrict supply and expect prices to be low for a high-demand commodity like oil.

“As much as Congress may think it is all powerful,” Mercier continued, “it can’t repeal the law of supply and demand.”

Aleks Karnick ([email protected]) writes from Indianapolis.