Pausing federal gas tax makes for excellent politics, terrible economics
The soaring price of gasoline has understandably upset Americans, given that prices for food and housing are also increasing. For many, their need for gas has had a disastrous impact on household budgets.
President Biden's request that Congress suspend the federal gasoline tax for three months is therefore a politically astute move.
But one hopes that Biden himself knows better, just as Richard Nixon knew better when he imposed a wage-price freeze as a response to high inflation. Nixon's freeze didn't work, and neither will Biden's plan.
An 18-cents-per-gallon tax reduction could not make much difference to consumers when gasoline is selling for $5 a gallon. Perhaps this is why Biden also asked state governments to forego collecting their gas taxes.
But even if all states joined the federal government in a gas tax holiday, it wouldn't reduce the price paid by consumers. That price is determined by the relationship between the supply of gasoline and the demand for it.
For various reasons, the available supply of gasoline has recently gone down. According to standard microeconomics, if the supply of gasoline is less than what customers are willing and able to buy, its price will increase.
This price increase will bring supply and demand back into balance. The higher price gives producers a greater incentive to produce more gasoline, if they can. But under today's circumstances they probably can't increase production in the short run.
The higher price also motivates consumers to cut back on the gasoline they are buying. This reduces the gap between supply and demand, and if the price increases enough it eliminates the gap entirely.
Now imagine that the federal and/or state governments declare a gas tax holiday. Say the total tax reduction comes to about 50 cents a gallon (it will differ here and there because of differences in the state taxes). This will reduce the incentive for consumers to cut back on how much gasoline they buy.
It will therefore be necessary for the price of the untaxed gasoline to increase by 50 cents a gallon if filling stations are not going to run out, like they did during the ill-advised price freeze during the Nixon administration. Consumers won't save anything, but the oil companies and service stations will enjoy a greater windfall, with 50 cents a gallon getting divided up between them.
In other words, Mr. Biden's proposal won't work if Congress enacts it and will just invite more hot air from the White House and Congress denouncing the "greedy" oil companies.
Even so, Biden's proposal is politically excellent. He will get credit for wanting to cut the price by voters who do not understand why it won't save them anything. If Congress doesn't enact the tax holiday, highly likely given its difficulty enacting anything, it will get the blame from gullible voters.
On the other hand, if Congress enacts the tax holiday, which I don't think Biden expects, we will be in for trouble. So here's hoping that Congress does what it does best about Biden's proposal: absolutely nothing!
This would actually be a great time for a temporary increase in the federal gas tax. For the same reasons why Biden's proposed tax decrease wouldn't save consumers anything, a temporary increase in the federal tax wouldn't cost them anything. It would just reduce the windfall profits that the current shortage is producing for the oil industry.
But Biden is too prudent to propose any such thing, and Congress is too cowardly to enact an increase. Voters wouldn't understand, and oil company spin-doctors would have a field day attacking those who voted for it.
Members of both branches of government will continue to complain about the greedy oil companies, while doing absolutely nothing to curtail the companies' ability to cash in on the current shortage.
Paul F. deLespinasse is professor emeritus of political science and computer science at Adrian College. He can be reached at pdeles@proaxis.com.
This article originally appeared on The Daily Telegram: Paul deLespinasse: Pausing federal gas tax: excellent politics, bad economics
