Why a gas tax ‘holiday’ is a bad economic idea

John W. Schoen Senior producer • Profile • E-mail

With two of the three presidential candidates proposing a gasoline tax “holiday,” some readers are wondering: Why can’t the government do more to cut gas prices?

If the feds can help with cutting interest rates why can't they do something that really affects everything? Like high prices of gas. How can a billion-dollar industry still be allowed to make so much and affect so many people?
— Lori H., Dodge City, Kan.

There are measures the government could take to ease the pain at the pump, but it’s hard to see how the U.S. government could directly control the price of a global commodity like gasoline — any more than it could limit what you can charge for that big-screen TV you’re trying to unload on eBay. Gasoline prices — like all market prices — are set by a willing buyer and a willing seller. (You may not be a “happy” buyer right now, but your purchases are still voluntary.)

The last time the federal government tried wage and price controls in the 1970s they didn’t work. Refiners chose not to make and sell gasoline at a loss, so there wasn’t enough to go around, and we all had to wait on gas lines.

Today, two of the three presidential candidates — John McCain and Hillary Clinton — have proposed a “holiday” on gasoline taxes. It sounds great, but it’s a terrible idea.

Eliminating the federal tax, about 18 cents a gallon, would encourage more driving, putting added pressure on supplies, and driving the underlying price of gasoline higher. Since gasoline taxes go to pay for rebuilding crumbling roads and bridges, this is probably not a good time to do away with them.

And making gas cheaper will only postpone progress toward developing alternative ways of fueling cars. Better to just give everyone a tax rebate (coming soon to a mailbox near you) to help ease the pain at the pump.

Our government could always subsidize the cost of gasoline, as some countries do. But that would cost money. We'd either have to borrow more money — adding to the debt we’re already piling up like there’s no tomorrow — or raise taxes elsewhere.

Some have suggested taxing the “windfall” profits of oil producers. So let’s look at those profits.

It’s true that as crude prices have surged, so have profits for the companies that produce the stuff. Exxon Mobil last week posted a $10.9 billion profit for the latest quarter — the second-biggest U.S. quarterly corporate profit ever. It may help to put that number in perspective. (Many readers don’t really want to do that, but here goes anyway.)

The reason big oil companies post such huge profits is that there are only a handful of them left after the price crash of the late 1990s sent crude prices to $10 a barrel, below the cost of production.

Major U.S. oil companies also found themselves bidding against bigger and better-funded state-owned competitors. (Today, U.S. oil companies produce about 10 percent of the world’s crude oil.) To fund those projects they needed lots of capital; getting bigger by merging was one way to do that.

But, hey, $11 billion for three months' work? Isn’t that a little much? On the next page, let’s look at how that compares with profits reported by other industries.

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