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May 05, 2008
Last post on gas taxes for a while (I hope)
A summary of all of my recent comments on the proposed gas tax holiday is as follows:
1. The benefit to the consumer would probably not be literally zero. (This is the part everyone has been seizing on as the most charitable thing being said about the proposal. Ok, so be it. If you call that charitable, you go ahead and run with it. See where it gets you.)
My reason for saying it would not be literally zero is that there is evidence that inventories are higher than usual and that capacity utilization is lower than a couple years ago. The system is probably capable of squeezing out a few more barrels, but not terribly many.
I would also add that the open letter signed by over 100 economists says, "...research shows that waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers." I have already said that I agree with that letter, and I think they were correct (but subtle) in saying that it would not significantly lower prices, leaving open the very sensible possibility that there might be a very small benefit. I fully agree with their wording.
2. While not literally zero, the consumer benefit is likely to be very small. I'd say a third or less of the total (half of what these authors found concerning the Illinois tax holiday in 2000). And I would probably bet the "under" if it came to that.
3. Good public policy should be well outside of the neighborhood of "pointless". (That is, the effects should be economically as well as statistically significant.) This proposal fails, even under my most charitable assumptions.
4. A tax holiday at the federal level will have less impact than the state tax holiday Illinois had in 2000. Then, gasoline could be diverted to Illinois from other states. That's harder to do at the national scale.
5. The average consumer will absolutely NOT notice the difference. Differences in price between locations and over time in the last couple weeks have far exceeded my most charitable estimate of the gain. Econometric studies would be done after the fact. There would be t-statistics, p-values, arguments over assumptions, and in the end some very small, but probably positive, estimates.
In short, I stand by my statement that consumers would likely see a couple (maybe even a few) pennies worth of benefit. But most importantly, the point I was trying to make was that this: This proposal does not have to be literally pointless for it to be a really bad idea. I think that is a worthwhile point to make.
But again, the relevant question is how much the price would have to fall to get consumers to buy up whatever increase in production would optimally be obtained if the tax were temporarily gone. That is, I think, the clearest statement of the question--and the answer is not much.
UPDATE: I have sent a message adding my name to the open letter.
Posted by William Polley at May 5, 2008 11:08 PM
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