Obama is wrong about the gas tax

Gasoline inventories are currently very high, and these surpluses can absorb much of any increase in demand. (See here.). Should gasoline consumption surge still higher, in the short run, refiners can also divert enough of the crude oil meant for other products -- diesel or jet fuel, for example -- into gasoline to meet demand.

On the demand side, let's face it: This is a tiny price cut. It is not likely to spur demand much beyond the usual seasonal increase in driving. And if oil companies do what Obama says they will do -- jack up prices to cover the tax -- there would be no incentive at all to drive more.

The media has attacked the Clinton plan for not being supported by the think tanks and economists. But there are a few economists out there -- such as Bill Polley -- who point out that if short-run demand is also inelastic, it is "not a foregone conclusion that the suppliers will get all the benefit." In fact, Polley concludes that consumers would get a nickel a gallon or more benefit -- not much, but better than nothing.

What about the charge that Clinton's summer tax holiday will spur consumption, leading to sharply higher long-term demand, thus crippling our efforts to conserve? Well, the economic literature suggests otherwise.

Basically, it is absurd to say that a summer-long price drop of this tiny magnitude will have any long-term effect at all. A meta-study by Molly Espey of 101 different economic studies, published in Energy Journal, found that in the short run (defined as one year or less), the average price elasticity of demand for gasoline is only -0.26. That is, a 10 percent hike in the price of gasoline lowers quantity demanded by 2.6 percent. As long as the price stimulus is small and short-lived, there is little if any long-term effect. And most experts agree that in order to actually curtail demand through taxes, it would take a much higher tax than is politically feasible.

Not one of the three major presidential candidates is calling for a $2 or $3 a gallon tax increase. The better long-term approach -- given the lack of political spine by any U.S. politician on this subject -- is higher efficiency standards, and big-time investment into transportation alternatives. Both Obama and Clinton are pushing these.

Finally, Obama says the gas tax holiday would cost thousands of construction jobs and lead to crumbling roadways and bridges. But if Clinton replaces the lost revenue with a windfall profit tax on oil companies, as she insists is necessary, then there would be no harm to our infrastructure repair work.

Many -- including Clinton backer and economist Paul Krugman -- have questioned whether Clinton's proposed windfall profits tax would work: "In one pocket, out the other. So it's pointless, not evil, " says Krugman. "But it is pointless, and disappointing."

But under Clinton's plan, if properly implemented, any additional profit realized by an oil company by passing on the cost of the windfall profits tax to customers would also be subject to the tax. This means a dollar passed through to consumers to offset the tax would appear as profit ... and be taxed.

How to enforce this? Make it against the law for oil companies to pass the price of the windfall profits tax on to consumers, and then audit the oil companies' books. It is not a difficult accounting exercise to tax excess profits above a certain gross percentage per barrel of oil, or gallon of gas. Every major oil company has sophisticated profit segmentation reports that go to the very senior management of the company. These reports identify revenues, costs and profit at each level of the vertically integrated operation, broken down on a per barrel basis by product type, marketing region, you name it.

The oil companies also will have a powerful inducement to avoid being caught -- and in this kind of toxic political environment, they may actually swallow the tax.

But it takes a little bit of courage to take them on, and a belief that we do not always have to be victims. Obama -- where is your optimism?

Update: The author responds to readers:

Let's be clear: Clinton's gas tax holiday is an exceedingly modest proposal. Its value is mostly symbolic. Even if enacted, which is unlikely, it would not do anything to solve our long-term energy problems. At best, it would slip a few bucks into the pockets of America's hard-hit motorists, and poke a finger in the eye of Big Oil.

My article aimed to look at the bases for Obama's attack on the plan, which to me looks just as "political" as Clinton's advocacy.

Obama claims he learned a lesson from the failure of the 2000 Illinois gas tax measure -- that the oil companies would inevitably pocket 100 percent of any federal tax relief in the form of higher prices. He infers from his Illinois experience that a federal tax holiday would also be doomed. But Obama's claim is not supported by the facts: The only empirical study I could locate found that at least 60 percent of the Illinois and Indiana tax relief actually did go to consumers. Is there any evidence out there otherwise? Let's hear from Obama's economic advisors.

A few readers have pointed out that the 2000 Illinois moratorium and Clinton's proposed moratorium involve two different kinds of taxes -- the former was a state sales tax, imposed at point of sale; the latter is a federal excise tax, which would be imposed at point of production. So it could be that the tax incidence is structurally different, a point I did not address -- but neither did Obama and his advisors.

I am not an economist (as more than a few readers have pointed out) and won't try to opine on how the difference between an excise and a sales tax might affect the economic analysis. I did come upon a study addressing the difference between state and federal tax pass-through, however: It found a higher incidence of pass-through of state taxes than federal taxes. (Here is a PDF of the study.) Perhaps that means that oil companies would pay a larger share of a federal tax imposed on all Americans.