Energy & Entrepreneurs #55

Candidates, Economics and the Gas Tax

by Raymond J. Keating

McCain was the first on the presidential campaign trail to float the idea of suspending the federal gas tax for the summer driving season. McCain would lift both the 18.4-cents-per-gallon gas tax and the 24.4-cents-per-gallon diesel tax.

Then Hillary Clinton adopted the gas tax suspension idea as well. But Clinton argued that the lost revenue to the federal government would have to be made up. How? Jack up taxes on oil companies, including imposing a so-called "windfall profits tax."

Obama doesn't like a temporary gas tax cut at all. Instead, he's taken with imposing a windfall profits tax in order to provide assorted low-income energy subsidies.

Does any of this make any economic sense? There's certainly been a lot of chatter in the media that nary an economist can be found to endorse a temporary gas tax cut.

Let's briefly consider the economics of the key points under consideration.

On suspending the gas tax, it's hardly an idea rooted in rock solid economics. Any benefits derived from a temporary tax cut are, by definition, temporary. At best, energy consumers or producers, or some combination of both, would experience a small, short-term gain.

The question then comes down to: Is the economy better off if those resources are left in the private sector or with government? Given the incentives that each operate under, it's pretty clear from an economics perspective that we're better off leaving those dollars in private hands. Keep in mind, the private sector is guided by price and profit signals, and the incentives of private ownership, while government is guided by political incentives. That translates into the private sector being far more efficient and responsive to consumers than government.

In the end, two things can be said about a temporary gas tax suspension. First, it's better than nothing. Second, it's better than the other ideas being discussed.

By the way, it also should be noted that some economists seem to mixing up economics and politics on this topic. Some have argued against this temporary gas tax cut because they want even higher gas taxes in order to force market players to invest more in alternative energy development. That's a political preference that has nothing to do with sound economics. Market signals do a better job of directing resources, including when it comes to investments on the energy front.

Meanwhile, the other idea being pushed by Clinton and Obama simply is to raise taxes on energy firms. The result would be to reduce the incentives and resources available for energy exploration and development.

Government raising costs for energy production is bad economics. Indeed, it's far worse economics than a temporary suspension of the gas tax.

Here's a thought. How about energy policies that line up with sound economic thinking? For example, reducing tax and regulatory costs imposed on energy production makes sense.

Also, permanently eliminating federal fuel taxes, and leaving highway and road spending to the states would be another big plus. That way, there would be far fewer taxpayer-funded roads to nowhere that tend to get funded with so-called free money from Washington. States also would be free to find innovative ways to fund their actual transportation needs.

Time to get back to economics on energy-related policies.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.