Gas Tax Holiday Could Become a Permanant Vacation

Ever since McCain and Clinton proposed and Obama opposed a Gas Tax Holiday, a proposal to repeal the 18.4 cent Federal tax on gasoline for the summer months, there has been near universal condemnation of the idea from a policy standpoint. There is another aspect though that is arguably worse. If enacted, the “holiday” would become a political football in the general election and runs the risk of becoming a permanent vacation.

Before getting into that, here is a little discussion of the policy debate. It can be skipped by those who have been following this issue closely.

Policy Considerations

The holiday is being proposed to supposedly give consumers a little relief from high gas prices that are reaching $4.00 per gallon, driven up largely by crude oil prices of $120 per barrel. The proposal has been widely panned. It is viewed as political pandering that will provide few if any benefits to consumers and create myriad other problems.

Consumers may not benefit since there is no assurance that much if any of the tax reduction will be reflected in price reductions at the pump. It is more likely that prices will remain at or near where they are today, and that elimination of the tax will have the effect of further lining the already bloated pockets of the oil industry.

Even if all of the tax relief was passed on to consumers the benefit would be very small, estimated between $30 and $70 per family. Those who argue that every little bit helps relieve the economic suffering of consumers and helps to spur the economy, lose sight of the fact that Congress already enacted a stimulus program providing most individuals and families between $300 and $1800 for the specific purpose of achieving those same two objectives.

Besides providing limited benefit consumers, opponents point out that the holiday will hurt the economy by increasing the budget deficit, enlarging the national debt, and/or reducing the funding available to rebuild our crumbling roads and bridges. On the fiscal issues, when we are running a deficit and have an outstanding debt, there are NO tax cuts. There are only deferred taxes that are imposed on our children and grandchildren. Regarding our infrastructure, now is the time to be spending more not less to rebuild our transportation infrastructure. Not only will it put people to work in this country but it will improve our productivity and spur future economic growth.

(Yes, Clinton couples her proposal with a windfall profits tax on oil companies. That is an excellent idea that should be enacted but it doesn’t really address the concerns about the tax holiday.)

Additionally, many argue that in a time of rising oil imports and increasing concern about environmental impacts, we should not be encouraging the consumption of gasoline. While high prices hurt, they may be the most effective way to reduce consumption and spur interest in high mileage and alternative fuel automobiles.

All of this has been discussed at length and forms the bases for the widespread opposition to the proposal among those who have studied it. But beyond these policy considerations there are big political downsides to the proposal.

Political Considerations, Now and Later

Clinton is championing the holiday because she thinks it will get her votes in the remaining primaries. Whether she is right remains to be seen. McCain apparently thinks it will burnish his image as a candidate with compassion for the economic straits of average voters that could help him in the general election. However, If supporting the holiday has political benefit today, that benefit will only translate to votes in the fall under one circumstance.

First, if the holiday is not enacted now, the question of whether or not a candidate supported it in the spring will have no impact on the general election campaigns. There will be no impact because the American people will have gone on with their lives and be looking to the future. They will not care about something that did not happen in the Spring and would be over with by then anyway. People will be dealing with the problems they are facing in the fall and judging candidates accordingly. There is one thing, though, that could change that calculus. A candidate could revive the idea and propose a tax holiday in the fall. That leads to the real political problem with the holiday.

If, God forbid, the tax holiday is enacted now, it will not die. As summer wanes there will be proposals to extend it for a period of months or maybe indefinitely. McCain will argue for the extension because he will consider the failure to do so as imposing a tax increase on consumers. We know that is how Republicans always package these things. They are doing it with the 2001 and 2003 Bush temporary tax cuts that are due to expire, and will certainly do the same with the gas tax. We will be mere months away from the general election and the ads will be a panderer’s delight. If the Democratic candidate does not support a continuation of the holiday, that candidate will be charged mercilessly with “wanting to raise your taxes.” No matter how bogus the policy arguments are, no candidate wants to subject themselves to that kind of attack.

Trying to rebut these types of attacks is tough enough when you are only facing the typical  type of fabricated charge that the Republicans always gin up against Democrats. This time, it will be much worse. In the fall voters will have become used to the world as it exists without the tax. They won’t know for sure whether the tax cut reduced their gas bills, but the Republicans will repeatedly claim that it saved them tons of money. Voters won’t see the impact of the tax cut on our deteriorating infrastructure and the slow cancer of the national debt. They will, however, see the prospect of the price of gas they pay at the pump increasing by 18.4 cents and will consider that when they cast their ballots. I fear that many will not look kindly on any candidate who supported that idea.

This tax holiday must not be enacted. It is terrible public policy. Moreover, passage of the holiday now could result in an effort to enact a permanent vacation in the fall. Such an effort could be a nightmare for our candidate in the general election.