On April 15th, Senator John McCain (R-AZ) called for a federal gas tax holiday from Memorial Day to Labor Day to give consumers "an immediate economic stimulus." Would it? No, it wouldn't.
Over that three month period, consumers would see 18.4¢/gallon less federal tax at the pump, but what would happen to the underlying price of gasoline? It depends upon whether gas stations can supply more gasoline. Refiners operate at peak capacity over the summer driving season. If they can't produce any more gasoline in that three month period, then oil companies and gas stations will raise gasoline prices by 18.4¢/gallon to sell the same amount of gasoline as they did before. All that will have been accomplished will be to transfer the $9 b. cost of this temporary gas tax holiday from the federal government to the oil companies.
There are other negative consequences. The Highway Trust Fund would get $9 b. less revenue that would have funded approximately 300,000 road building jobs over the summer. To avoid killing those jobs, Senator McCain would transfer $9 b. from general revenues to the Trust Fund. That would mean the government would have to borrow an additional $9 b., forcing taxpayers to pay additional interest expense.
Lowering gas prices would send the wrong signals to consumers and producers alike. Consumers would drive more and would hang onto their gas guzzling SUVs longer. Oil producers and refiners would have less incentive to expand supply. They couldn't do that in the short run, but in the long run they could, if they believed the elevated prices would remain. Once gasoline prices drop, investments to expand supply would be shelved, and future investment would be impaired out of fear that a one-time gas tax holiday might turn into an annual event.
Andrew or Pete: HELP! Question re: gas tax
Andrew / Pete,
I've got a question that I haven't been able to figure out the answer to, find the answer to or get the answer to, and I'm hoping you can help.
I've heard of studies that put the short-term elasticity of demand (however "short-term" defined) somewhere between 0.10 and 0.25, but if we assume some elasticity (as opposed to short-term demand being perfectly inelastic), there's something I don't get.
If suppliers were at capacity LAST summer, when the retail price of gas was substantially lower, and if demand is somewhat elastic, then we would expect that at this summer's much higher price, demand would fall below suppliers' capacity, unless capacity shrunk or the demand curve shifted sufficiently rightward (i.e., that consumers this year willing to buy more gas at this year's price than they would have been willing to buy last year at this year's price -- or put differently, that consumers this year are willing to buy the same amount that they bought last year, but at this year's much higher price).
That's why it seems to me that either suppliers were NOT at capacity last year, or they were, and if they were and if they still are at capacity (and if capacity hasn't shrunk and the demand curve hasn't moved rightward enough to explain it), then both short-term demand and short-term supply have been perfectly inelastic over the relevant price range -- in other words, overlapping vertical lines over that range, with multiple price equilibria, and the price determined by whether or not suppliers are seeking to (1) maximize short-term profits, in which case they'd price at least at the top of the overlapping vertical segment, OR (2) if they are willing to sacrifice maximization of short-term profits for the sake of longer-term objectives (e.g., wanting to slow the development of substitutes or of conservation, or reducing the risk of governmental intervention such as a windfall profits tax or price controls*), in which case the price could be at a lower point along the vertical segment. If scenario #1 is the actual case, then removal of the tax will simply lead to suppliers raising the price by the equivalent amount, resulting in no retail price change and increased profits for suppliers. If it's scenario #2, suppliers would allow the retail price to decline by some or all of the amount of the (removed) tax.
I'm also assuming differences in inventory don't account for the above dynamic.
* Regarding this political risk, remember that one of their primary public relations talking points is that their earnings AS A PERCENT OF SALES is not out of line with many other industries (http://www.nysun.com/news/business/congress-questions-oil-executives-ear...), so if they are targeting a particular percent of sales as their ideal balance between the objectives of short-term profit and the longer-term objective of avoiding governmental intervention, they may not want to use the suspension of the gas tax as an opportunity to raise the price, which would increase their earnings as a percent of sales.
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