It has been widely reported that over 200 recognized economists, spanning the political spectrum, have signed an open letter opposing the federal gas tax holiday proposed by Sens. John McCain (R-AZ) and Hillary Clinton (D-NY). Despite the ubiquitousness of reporting about the letter, we’ve been unable to locate an authoritative copy of it. Still, what we have have found raises questions about the economists’ economic reasoning.
Jonathan Weisman of the Washington Post quotes predictions from the economists’ letter:
“First, research shows that waiving the gas tax would generate major profits for oil companies rather than significantly lowering prices for consumers,” they wrote. “Second, it would encourage people to keep buying costly imported oil and do nothing to encourage conservation. Third, a tax holiday would provide very little relief to families feeling squeezed.”
The third conclusion seems reasonable given the 18.4 cent per gallon magnitude of the federal gas tax. We’ve previously posted on the small magnitude of household-level savings. Our focus was different, however. We noted that at the same time the candidates and their allies argued whether suspending the gas tax would save consumers a significant amount of money, all three candidates have promised to enact climate change legislation that would raise the price of gasoline by a dollar per gallon. None of the candidates is talking about this. A Google news search on the gas tax yields over 1,500 hits. A similar news search on carbon taxes including references their effect on future gasoline prices yields very few hits — just 15 as of 10:10 pm on May 7, and it’s in the context of a criticism of Sen. McCain’s gas tax holiday proposal.
We can’t be sure Weisman quoted the economists’ letter accurately and completely, but we have no reason to doubt him. Taking his version at face value, the first prediction (“waiving the gas tax would generate major profits for oil companies”) and the second prediction (“a tax holiday would provide very little relief”) appear to be in conflict. If oil companies did not pass on the savings to retailers and retailers did not pass on the savings to consumers, gasoline prices would not fall. If gasoline prices did not fall, consumers would have no incentive to purchase more gasoline in response to a retail price decline, because no such price decline would have occurred. One of these predictions must be false