The Gas Tax: Where's The Savings?

Had Barack Obama not interrupted his day to denounce his former pastor, he would have used some new language to describe the gas tax holiday proposed by John McCain and Hillary Clinton.

"This is the problem with Washington. We are facing a situation where oil prices could hit $200 a barrel. Oil companies like Shell and BP just reported record profits for the quarter. And we’re arguing over a gimmick that would save you half a tank of gas over the course of the entire summer so that everyone in Washington can pat themselves on the back and say that they did something."

Economist Jonah Gelbach weighs in:

" point that has gone largely unreported in the regular media is that a brief gas tax holiday would likely do little to reduce prices for consumers simply because in the short run the supply of gasoline is relatively fixed (in econese, the short run supply curve is close to vertical). As a result, a cut in the gas tax of brief duration will simply cause the pre-tax price of gas to rise. This would mean that the price paid by consumers would change relatively little, if at all (tho James Hamilton's post, linked below, suggests the consumer price might fall by as much as half the gas tax, which I think would be about 9 cents). Instead, the price received by oil companies would simply rise, providing them with windfall profits."

Gelbach is an Obama supporter; for more analysis that backs up his reading of the inelasticity of oil prices, see here.

Clinton's proposal, of course, would target the windfall profits and would in theory be revenue neutral, depending on how the tax is set up and collected. McCain's proposal would add to the deficit.