Bryan Caplan responds to James Hamilton's post.
Bottom line: No one is going to listen to the politician who says "Do nothing." Under the circumstances, I can't think of a single politically viable policy that would be better than cutting the gas tax. Maybe it would mildly reduce the price of gas. But even if supply is so inelastic that 100% of the tax cut goes to suppliers, it is easy to overlook a big social benefit: Tax cuts have a good chance of politically crowding out price controls and worse.
I have to admit that there's a part of me (the cynical part) that wants to stand up and cheer. And I will face up to the fact that if price controls were being seriously considered, to the point of a bill in the legislature, I would stand shoulder-to-shoulder with Caplan in arguing for tax cuts instead.
Most of the discussions of this issue are in states that only have excise taxes. What about states that put an ad valorem sales tax on gasoline?
Full disclosure: I happen to live in one of those states.
In Illinois, the big debate now is what to do with all that tax revenue. (WBBM-CBS 2 Chicago) Quoting from the last part of the article,
“I say put the money into the road fund and begin to replenish that billion and a half dollars,” said Ron Gidwitz, a Republican candidate for governor.
“We should eliminate the state sales tax on gasoline,” said State Sen. Kirk Dillard (R-Hinsdale).
But because tax receipts from Illinois casinos and on the sale of cigarettes are falling short of projections, the governor's budget boss claims total tax collections will come out even with no windfall.
“To do the kind of things that they're proposing is giving no eye to the future and making sure that Illinois remains fiscally stable, which it now is,” said John Filan, state budget director.
But a legislative commission sees a gasoline tax windfall with receipts jumping from $359 million to $439 million to the $615 million projected for the current fiscal year 2006.
“We should maintain the current tax on gasoline because eventually the market's going to level out,” said Jeff Schoenberg (D-Evanston).
Both Democrat and Republican lawmakers would like to see this gasoline sales tax windfall go to a special account to attract matching federal transportation dollars.
But the governor's budget boss says the gas tax money is needed for rising health costs and that the state's road fund is healthy enough already to draw the matching federal bucks, despite what legislators say.
We pay 19 cents per gallon in excise taxes and then from 6.25 to 9.25% in sales tax depending on where you live (fortunately the low end where I live). That could mean up to 45 cents total for the state (then you have the 18.4 cents in federal gas taxes). No wonder the state's gas tax revenue is booming! The sales tax component has approximately doubled since prices were $1.50/gallon. (Those were the days!)
Aside: Another source (Center on Budget and Policy Priorities) lists the per gallon tax in Illinois at 20.1 cents. They are against lifting state taxes, by the way.
The effect of Hurricane Katrina on gas prices is likely to be somewhat short lived as the refineries come back on line. Furthermore, the market may have overreacted a little bit initially. As a result, the price of gas should come down, albeit slowly, over the next few weeks. That's not a situation in which I would ordinarily argue for getting the political machinery in place to temporarily reduce taxes.
Of course, the cynic in me says that if they eliminate the gas tax when prices are trending down, the politicians will certainly claim credit for what was going to happen anyway--even if the tax holiday only helped the suppliers and not the consumers.
After all, being able to claim credit for something good that was going to happen anyway is a politician's dream come true.
Post hoc ergo propter hoc, anyone?
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