Obama is wrong about the gas tax

Think Clinton's plan to suspend the gas tax temporarily is a bad idea? A similar measure in Illinois -- which Obama backed -- seems to have helped consumers.

Editor's note: This story has been updated since it was first published.

By George Frost

Read more: Indiana, Hillary Rodham Clinton, Economy, Opinion, Oil, Barack Obama, 2008 election

Salon composite / Reuters photos

May 6, 2008 | Democratic presidential candidate Barack Obama has repeatedly accused rival Hillary Clinton of "pandering" for advocating a summer gas-tax moratorium, calling it a "classic Washington gimmick" that would do little to help consumers.

"That's typical of how Washington works," Obama says in a new TV ad airing in Indiana, where primary voters go to the polls Tuesday. "There's a problem. Everybody's upset about gas prices. Let's find some short-term quick fix that we can say we did something even though ... we're not really doing anything."

Obama dismisses Clinton's proposal to suspend the 18.4 cent per gallon federal gas tax as: 1) a political gimmick that will not deliver any significant relief to consumers, while diverting us from the serious energy reforms we need to undertake; 2) an opportunity for oil companies to raise prices to capture the missing tax increment; 3) an inducement to drivers to drive more, thus leading to more consumption and higher prices down the road; and 4) a drain on highway trust funding, which is sorely needed to repair our crumbling infrastructure.

This is powerful criticism because it resonates with a long-standing talking point against Clinton -- that she is a political phony willing to do anything to get elected.

But in this case, each of Obama's attack lines is either factually incorrect, or based on flawed logic. Could he be attacking Clinton just to deny her any political benefit? That would be as cynical and "old style" as anything Clinton has thrown at Obama lately.

American drivers are hurting, especially those who must drive a lot -- commuters, truckers, carpool moms. Millions of lower-income rural and exurban Americans must drive long distances to their jobs, meaning high gas prices take a disproportionately large chunk out of their incomes. Some are having to choose between gasoline and food. A savings of $30 or $50 is a significant amount of cash for at least some Americans.

Despite the "gimmick" slam on Clinton, could it be that Clinton is sincerely trying to help, albeit in a very modest, and politically self-serving way? The evidence suggests that Clinton's plan might work. It also raises the question of why Obama hasn't made a similar proposal. He was certainly proud to back a gas-tax moratorium eight years ago.

While an Illinois state senator, Obama supported a state tax holiday very much like Clinton's proposal, but without the saving mechanism of a windfall profits tax.

CBS News says Obama voted for the temporary lifting of the tax three times in the state Senate. The tax holiday was finally approved during a special session in June of 2000, when Illinois motorists were furious that gas prices had just topped $2 a gallon in Chicago. The moratorium lifted the state's 5 percent sales tax on gasoline through the end of 2000.

Obama told constituents that gasoline prices would drop: "Gas retailers must post on each pump a statement that indicates that the state tax has been suspended and that this temporary elimination of the tax should be reflected in the price per gallon of gas."

During one state Senate floor debate, Obama joked that he wanted signs on gas pumps in his district to say, "Senator Obama reduced your gasoline prices."

Now, running for president, Obama says the tax reduction was a complete failure, and that "the oil companies, the retailers" ended up benefiting most because they raised prices by the entire amount of the tax cut.

"I voted for it, and then six months later we took a look, and consumers had not benefited at all," Obama said. Having learned this hard economics lesson from his Illinois "mistake," Obama now argues that a federal tax holiday also will fail for the same reason -- the oil companies will take it all.

But Obama is wrong. He did not learn this lesson. In fact, the only scientific study done on the pass-through of the tax holiday savings to Illinois consumers (and those in Indiana, as well, whose citizens enjoyed a similar holiday) found that it actually worked to a large extent.

The study is titled "$2.00 Gas! Studying the Effects of a Gas Tax Moratorium," by Joseph J. Doyle Jr. and Krislert Samphantharak. Download the PDF here. The authors concluded that "the suspension of the 5% sales tax led to decreases in retail prices of 3% compared to neighboring states. And when the tax was reinstated, retail prices rose by roughly 4%."

This suggests that the tax holiday delivered at least 60 percent of the tax savings to motorists.

The economic basis for attacks on the Clinton tax holiday is a fundamental economic theory called "tax incidence." It says that the cost of a tax on any consumer product will be borne by those with lesser "elasticity" in the tug of war between suppliers and consumers. "Tax incidence" falls mostly upon the group that responds least to price -- the group that has the more inelastic price-quantity curve. In this instance, assuming that the supply of gas is pretty much fixed, it means consumers will end up paying those missing tax dollars directly to the gas companies in the form of higher prices. The increased demand triggered by the price cut will supposedly lead drivers to bid up the price of gas, swallowing the tax cut.

But this is not what happened in Illinois and Indiana back in 2000. And there are factors at work today that might provide equal or more "elasticity" to the producers, and prevent consumers from paying the price for the tax cut.

Next page: None of the candidates is calling for a $2 or $3 a gallon tax increase