McCain's gassy tax relief

An economics and transportation expert evaluates the presidential hopeful's plan to suspend the gas tax: "It's a terrible idea."

By Katharine Mieszkowski

Read more: Environment, John McCain, Politics, News, Taxes, Economy, Cars, Katharine Mieszkowski

April 21, 2008 | Last week, Sen. John McCain proposed that the nation take a gas tax holiday this summer. With oil topping $115 a barrel and gasoline prices hovering in the mid-$3-per-gallon range -- shooting as high as $4 in some places like the San Francisco Bay Area -- the Republican presidential candidate wants Congress to suspend the federal tax of 18 cents per gallon for gasoline and 24 cents per gallon for diesel from Memorial Day to Labor Day.

"The effect of this 'gas tax holiday' will be an immediate economic stimulus -- taking a few dollars off the price of a tank of gas every time you fill up," McCain wrote in a fundraising e-mail to campaign supporters on April 17. "And because the cost of gas affects the price of food, packaging and just about everything else, this immediate step will spread economic relief to every family in America."

The federal gas tax has not budged since 1993, when the Clinton administration raised it by 4 cents to help reduce the federal budget deficit. Critics have raised questions about the efficacy of McCain's proposed tax holiday, with some deriding it as a campaign gimmick. McCain's holiday would cost the federal government about $9 billion, monies normally spent on roads, bridges and other infrastructure, while potentially increasing the already staggering federal deficit. Eliminating the federal gas tax would also amount to a government-sanctioned incentive to encourage driving, at a time when even President Bush is saying that we need to reduce our greenhouse gas emissions.

Christopher Knittel, professor of economics at the University of California at Davis, argues that federal fuel taxes shouldn't be going on holiday this summer. In fact, he contends that the taxes should be hiked up 50 cents, or even a dollar, to help fight global warming, this summer and beyond. The professor, whose research is in energy, transportation and environmental economics, has studied gasoline markets and vehicle choice. His work shows that relatively high gas prices over the past four years have inspired some Americans to choose more fuel-efficient cars, which is beginning to reduce overall gasoline consumption.

Salon spoke with Knittel about why he thinks Americans need higher gas taxes, not lower ones, and why both Sen. Barack Obama and Sen. Hillary Clinton's plans for a cap-and-trade system to limit greenhouse gas emissions would amount to a higher gas tax by another name.

What do you think of McCain's proposal for a gas tax holiday this summer?

Politically it's a great idea for McCain. It hits on two main issues: Gas prices are high and he's also lowering taxes. For the economy and for society at large, it's a terrible idea.

The U.S. is just now starting to get on board with the idea that we need to fight climate change, and this is just reversing that fight. Basically we're going to reduce the price of gasoline, which means consumers are going to respond by either driving more in the short term or changing how they make vehicle purchases and buying less fuel-efficient cars, because fuel efficiency won't be as important.

So, as a country, if we really believe in the need to fight global climate change, this is the exact opposite of what we should be doing.

The federal gas tax is 18 cents a gallon. Would subtracting that amount change drivers' behavior?

It's not likely to change our short-run behavior in terms of the number of miles we drive. It's not like McCain suspends the gas tax and I say, "OK, now I'm going to drive to the grocery store," where before I wasn't. But what we are seeing now is that these higher gas prices are changing the vehicles people buy.

Is that because gas prices have been going up for a while?

We've moved away from thinking, "The price is high this month, but I expect it to be low next month" to "It's high, and I expect it to be high, so what am I going to do about it?" So we're seeing people shift from vehicles that are less efficient -- pickups and SUVs and large cars -- to compacts and midsize cars. In fact, even with midsize cars and SUVs, people are choosing the more fuel-efficient ones. So we're seeing some pretty large changes in what people are buying.

But that's likely to be reversed if the government tells everyone this gas tax break is a constant price reduction -- the holiday being every year. If they just did it one year, and said, "OK, next year, the gas tax will be back on during these three months," then consumers are likely to still worry about high gas prices.

What do you make of McCain's argument that suspending the gas tax would provide an economic stimulus by putting extra bucks in drivers' pockets?

That argument has weight if we believe that the government is misspending the revenues that it would be collecting from the tax. It hinges on the idea that consumers would spend the money more wisely than the government. Republicans will argue that consumers are better able to spend their money than the government, so we should have lower taxes. But it's really no different from the traditional argument that we have about government spending money vs. citizens.

How does our gas tax compare with the gas tax in other countries?

We're spoiled. In Europe, gas taxes are typically at least 100 percent of the base gas price. Gas prices in Europe are at least twice as large as they are here. Our federal gas tax is 5 percent when a gallon of gas is $3.60. State tax certainly increases that, and there is a lot of variation across states.

You're saying the downside of the gas tax holiday is that it creates an incentive for people to buy larger cars?

I don't want to overstate things. It's going in the opposite direction of what the stated goals of the country are, which is to try to reduce our greenhouse gas emissions. It's counterproductive.

Next page: Wouldn't a higher gas tax penalize low-income drivers?