TOPICS > Politics

Gas Tax Holiday Plan Provides Fodder for Campaigns

April 30, 2008 at 6:25 PM EDT
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Presidential hopefuls Sens. Hillary Clinton, D-N.Y., and John McCain, R-Ariz., have raised the idea of suspending the federal gas tax for the summer. A tax policy expert explains whether a gas tax holiday is politically or economically feasible.

JUDY WOODRUFF: Now, another economic issue that’s on the minds of many Americans: rising gasoline prices. It’s on the minds of the presidential candidates, too. Gwen Ifill has the story.

GWEN IFILL: Fuel prices are setting new records. A gallon of regular unleaded gas costs on average $3.60 a gallon. Economists say that’s headed to $4 this summer.

The subject has become Topic A on the campaign trail. Hillary Clinton arrived at an Indiana gas station today in a Ford pickup, followed by a fleet of 10 SUVs.

SEN. HILLARY CLINTON (D), New York: I want to go after the oil companies. I think it’s past, way past time.

GWEN IFILL: After factory worker Jason Wilfing pumped the gas — Senator Clinton paid — she pitched one approach to lowering the bill: a summer-long federal gas tax holiday. Later, she talked about it at a South Bend sheet metal factory.

SEN. HILLARY CLINTON: Make the oil companies pay the federal gas tax this summer. Now, some people say, “Well, that’s not a lot of money.” Well, it depends upon what you do for a living and how far you drive to work.

If you’re a trucker, it’s a lot of money. If you’re a farmer, it’s a lot of money. If you commute 60, 70 miles, it’s a lot of money.

And my opponent doesn’t believe in any kind of gas tax holiday, and Senator McCain is for a gas tax holiday, but he won’t pay for it. That’s not acceptable, because the money then won’t go into the Highway Trust Fund and we’ll get further and further behind in taking care of our roads, which is not a good idea.

So here’s what I want to do: impose a windfall excess profits tax on the oil companies.

Candidates debate gas tax idea

GWEN IFILL: Federal taxes on gas now total about 18 cents a gallon, which goes to pay for road and bridge construction. John McCain first raised the idea of a tax holiday two weeks ago.

SEN. JOHN MCCAIN (R), Arizona: The effect will be an immediate economic stimulus, taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up.

Over the same period, our government should suspend the purchase of oil for the Strategic Petroleum Reserve, which has also contributed to the rising price of oil.

This measure, combined with the summer-long gas tax holiday, will bring a timely reduction in the price of gasoline.

GWEN IFILL: But Senator Barack Obama rejected the approach as a political stunt.

SEN. BARACK OBAMA (D), Illinois: Senator Clinton, following Senator McCain's lead -- I mean, John McCain was the first one to come out with this, and then Senator Clinton said, "Me, too" -- decided they were going to propose a federal gas tax holiday.

Now, sounds good. Maybe it polls well. But here's the truth: it would save the average family $30 bucks over the course of three months, $28. Or, more precisely, 30 cents a day, which is less than you can buy a cup of coffee for at the 7-Eleven, 30 cents a day.

It's not a real solution. What it is, is it's a gimmick to get you through the election.

GWEN IFILL: At the White House earlier this week, Press Secretary Dana Perino at first appeared to agree, saying the idea was disingenuous and unfortunate, but President Bush indicated some flexibility yesterday.

GEORGE W. BUSH, president of the United States: I'm open to any ideas, and we'll analyze everything that comes our way. We'll let the candidates argue out their ideas. I just told you I'll consider the ideas. If it's a good idea, we embrace it. If not, we're analyzing the different ideas coming forward.

Oil market trends enter campaigns

GWEN IFILL: Congress has not yet taken up the proposals.

So is a gas tax holiday politically or economically feasible? For a look at how and whether such a plan would work, we turn to Leonard Burman, director of the Tax Policy Center, and a senior fellow at the nonpartisan Urban Institute here in Washington. He was a treasury official in the Clinton and the Reagan administrations.


LEONARD BURMAN, Tax Policy Center: Happy to be here, Gwen.

GWEN IFILL: Can we start by explaining to people why gas prices got so high, so fast?

LEONARD BURMAN: Well, because there wasn't enough gasoline to meet demand. I mean, the prices go up to make sure that there aren't shortages.

GWEN IFILL: Is it a seasonal issue? It feels like we talk about this just before Memorial Day every year.

LEONARD BURMAN: Well, OK, so what happens -- every summer, the gas price goes up, because refineries are going at full capacity and they can't produce anymore. And people want to drive in their cars for vacations.

GWEN IFILL: We heard that there's 18 cents a gallon tax. How much of the increases can be attributed to tax increases?

LEONARD BURMAN: I mean, over the long term, gas tax certainly is built into the price. The issue here, though, is if we eliminated the gas tax it wouldn't translate into an immediate reduction in the price, because refiners are running at full capacity. They can't produce more. If the price went down, there would be shortages.

GWEN IFILL: Explain that to me some more. So you're saying, even if they take 18 cents a gallon of the cost of a tax -- the cost of a gallon of gas, that wouldn't necessarily get passed onto the consumer?

LEONARD BURMAN: No, I think only a tiny fraction would get passed on. The problem is -- I mean, every summer gas prices go up because refineries are producing all they can. People want to drive more. They go on vacations with their families.

Suppose the price actually did go down by 18 cents. People would drive farther away for their vacations; they would drive instead of flying to a vacation; they'd take more trips during the summer.

The problem is that there aren't millions and millions of gallons of additional gasoline to put on the market. If the price went down, there would be shortages. Gas stations would run out of gasoline.

So the price has to go back up -- that's the way the market resolves this conflict -- and, eventually, I think most energy experts think that the price would end up very close to where it would have been if the gas tax hadn't been abated.

Tax holiday avoids the problem

GWEN IFILL: It's hard for voters trying to decide what to do this year, to decide who's right on things like this. We just heard Hillary Clinton say this can be a lot of money for people who are long-distance truckers or who drive great distances to work. We heard Barack Obama say, "This is 30 bucks of savings." Who's right?

LEONARD BURMAN: Well, they're actually both wrong. I mean, $30 bucks assumes that the price would fall for an average consumer and the price isn't going to fall very much. It's maybe a couple of bucks for an average American family driving their car in the summer.

GWEN IFILL: So you're saying that -- there's no solution here at all, even a short-term piece of relief for people?

LEONARD BURMAN: Well, this isn't the solution. I mean, the problem is the markets just don't adjust that fast. If you eliminated the gas tax forever, which would do horrible things for the Highway Trust Fund, but if you did that, then refiners would add capacity, we'd import more gasoline from other places.

But you're talking about doing this in less than a month from now and only for four months. Over that short time period, the market's just not going to be able to adjust.

GWEN IFILL: And how about the flip side? What happens? I mean, those taxes are there for a reason, theoretically, for infrastructure mostly. What happens to that lost revenue? How is it replaced? Or is it replaced?

LEONARD BURMAN: Well, Senator Clinton has said that she would put in place a windfall profits tax to make up the lost revenue. Senator McCain has said he would just pay for it out of general revenues, which is to say it would add to our already humongous budget deficits.

The windfall profits tax is kind of inconsistent with the idea of trying to lower prices, because the way it was done the last time we had one, which was in the early 1980s, was there was an excise tax. When the price of oil got above a certain level, there was a tax on that difference.

If that were in place over a long period of time, it would reduce the incentive for oil companies to explore, look for more sources of oil, and eventually it would increase prices. That actually might not be a bad idea from an environmental perspective, but it's certainly not consistent with what the candidates are talking about.

No economics in political solution

GWEN IFILL: Is there any short-term solution like this that could affect long-term pressures, upward pressures on prices?

LEONARD BURMAN: I don't really think so. I think the problems we have are long-term problems.

We need to add capacity. We need to encourage people to conserve, find ways to use less gasoline, actually. And if we did that, then that, over time, would push down the price of energy.

And, in fact, if you consider the climate change consequences, the fact that when you burn gasoline you're putting CO2 into the atmosphere, over time we probably want gasoline prices to be higher so people can use other sources of energy that are less damaging to the environment.

GWEN IFILL: There have been tax holidays proposed at the state levels, because the tax money isn't all federal tax money in a gallon of gas. Does it work differently at a state level? Is it preferable on a state level?

LEONARD BURMAN: Well, it can work at a state level, especially if it's a small state. If the state of Delaware decided to eliminate its gas tax, they could get as much gasoline as they wanted on the free market. They could go anywhere from Pennsylvania to New Jersey.

The problem is that, if you do it at the federal level, that's the entire country. There are no other places within the country where we can get additional gasoline.

We might be able to import a little bit from Canada, a little bit from Mexico. But we're huge consumers relative to our neighbors. And there's just not a lot of extra unused gasoline sitting around waiting for us to burn.

GWEN IFILL: So you'd say a political solution rather than an economic solution?

LEONARD BURMAN: That's what it appears to be.

GWEN IFILL: Leonard Burman, thanks a lot.

LEONARD BURMAN: My pleasure.