Gasoline-tax reprieve: an idea running on empty

Minimal cost savings, increased dependence on foreign oil, and high administrative costs are among reasons why this idea ran out of gas.

The small cartoon on the Tax Policy Center's website shows a man's head with a gaping hole through it and the words "Stupid Tax Trick." The words refer to the proposal by Republican Sen. John McCain to suspend the 18.4 cents per gallon federal excise tax on gasoline between Memorial Day and Labor Day.

The presumptive Republican presidential nominee's suggestion was quickly picked up by Sen. Hillary Rodham Clinton, campaigning for the Democratic nomination. The idea, however, died a quick death in the Senate last week at the hands of a Democratic caucus drafting a bill aimed at giving relief from soaring gas prices. To many economists and others, the short tax holiday didn't make much sense.

"It's a terrible idea," says economist Eric Toter, coauthor of the article that accompanied the cartoon and was headlined, "What Were They Thinking???"

Undoubtedly, they were thinking politics. A new survey by the Kaiser Family Foundation found that paying for gasoline easily tops the list of economic woes seen by American families. Some 44 percent of those surveyed saw their gas bills as a "serious problem."

"It's out of the political pandering playbook," says Robert Bixby, executive director of the Concord Coalition, a nonpartisan organization pushing for elimination of the federal budget deficit.

Sen. Barack Obama, Senator Clinton's rival for the Democratic nomination, did reject the idea. On this issue, he's "the only one that looks like a grown-up," comments Mr. Bixby.

President Bush also disapproved. Of course, he's not running for office.

Here's why critics say the gasoline-tax holiday plan is a bad idea:

•It wouldn't save the average consumer much money. If a driver uses 10 gallons a week, he or she would save about $26 during the three months – enough to buy seven or eight milkshakes. A driver with a long commute to work would, potentially, save more. So would the truck drivers who were circling the Capitol in a horn-blaring caravan last week, angered by the 24.4 cents per gallon tax on diesel fuel.

The problem, says Mr. Toter, is that the cheaper fuel would encourage Americans to drive more – say an extra trip to the beach. The end result – after increased summer demand stretches American refining capacity to the limit – would be even higher prices.

It wouldn't "do anything" for the consumer, Toter concludes. It would just boost the already record profits of refiners and oil companies.

An econometic analysis by Jeff Perloff, an economist at the University of California, Berkeley, is not so harsh. Drivers might save 9 to 12 cents a gallon despite the rising demand, he reckons.

•The gas-tax break would do nothing about United States dependence on imported oil, or, for that matter, on a limited supply of domestic oil. Contrariwise, it would add to consumption and to global-warming emissions.

"We are the laughing stock of Europe because we keep [gasoline] taxes so cheap," notes Matthew Simmons, chairman of a Houston-based investment bank for the energy industry, Simmons & Co. International.

The state gasoline tax, which ranges as high as 32.1 cents in Wisconsin and as low as 8 cents in Alaska, averages 28.6 cents a gallon. So, add in the federal tax, and the average tax totals 47 cents. Way low by European standards. In Germany, for example, gas is taxed at about $2 per gallon.

Only last January, a bipartisan commission appointed by Congress recommended a 40-cent boost over five years in the federal gas tax with revenues used to improve the nation's transportation system.

•The tax break would add to the federal deficit. Gas-tax revenues normally go to the Highway Trust Fund, which is used to maintain and improve the highway and public transit systems. One proposal in Congress would have substituted Treasury revenues for the lost HTF money.

•The change would be an administrative nightmare for the nation's retail sellers of gasoline.

"It would be a logistical challenge," says Jeff Lenard, spokesman for the convenience stores that sell 80 percent of the nation's gasoline supply.

At this time, Republicans and Democrats are busily trying to blame each other for the troubling high gas prices. For instance, sometimes more than once a day House Republican Leader John Boehner issues a press release teasing Speaker Nancy Pelosi for not presenting her long-promised "common sense plan" to lower gas prices.

For now, Washington is looking for other ways to hold down gasoline prices. One popular idea is to stop filling the Strategic Petroleum Reserve. At present it contains 701 million barrels, enough with private oil company reserves to substitute for imported oil for 118 days. It is being filled at a rate of 70,000 barrels daily, not a hefty amount compared with imports of 10.1 million barrels a day.

"We are addicted to petroleum, a source of energy which is gradually going to disappear," warns Michael Klare, who teaches international affairs at Hampshire College in Amherst, Mass. He says the US must really work on "alternative" energy sources.

That's not a short-term solution.