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Don’t suspend federal gas tax

Local Commentary

Posted: May 8, 2008 2:57 a.m.
Updated: July 9, 2008 5:02 a.m.
With the recent surge in gas prices, talk of suspending the federal gas tax is again making the rounds.

Most recently it has become a talking point in the presidential campaign, with candidates from both parties arguing for a suspension of the gas tax.

While the idea has understandable appeal to consumers suffering with gasoline prices that now commonly exceed $4 a gallon in the SCV, as most economists will tell you, it's a bad idea. Societies have two general ways to allocate scarce resources.

In a planned economy, the government sets the prices and addresses market shortages through various allocation schemes. In other words, you can buy all the gas you want at an artificially low price, but only on certain days or only if you're willing to suffer through long lines (and pay with your time instead of your money). In a market economy like ours, the market sets the price and the amount supplied and the amount demanded adjust with that price to a market clearing level. That price is a function of a number of variables, most of which are ultimately caught in the supply-demand curves many of us were exposed to in our Econ 1 class.

The federal gas tax is approximately 18 cents a gallon; if that were suspended, then various market incentives would be triggered, which market participants would respond to.

First, given the lower price, consumers on average would drive a little more, which would increase demand and offset some of that price reduction. Secondly, suppliers would have an opportunity to capture some of that price reduction in increased margins; they would raise their prices to offset some of that price reduction and capture it in higher profits. Third, as those two effects play themselves out, consumers should see some net reduction in what they ultimately pay for the gas they consume over the summer, which economists and congressional analysts have estimated to be somewhat less than $30 for the average consumer.

It is certainly painful for all of us to see gas prices rise fourfold since the gas tax was last materially increased in 1993, but that is how a market economy allocates a scarce resource. Why that particular resource has become so much more expensive in the last few years is a complex topic that warrants a separate writeup, but it stems in part from the growing demand for oil from large economies that are seeing rapid improvements in their standard of living (for example, India and China); in part because of the volatility introduced into the oil market as a result of the war and ensuing instability in Iraq; and in part because of the weakness of the U.S. dollar, which results in oil sellers requiring more dollars per barrel relative to other currencies.

In the face of these rising prices, consumers are finding answers to the problem. NADAguides reports that in the first quarter of this year, consumer interest in compact cars has doubled. One of Ford's most fuel-efficient cars - the Focus - saw its sales climb 36 percent in February, especially notable in a period where Ford's overall car sales fell. As consumers switch to more fuel-efficient cars, market forces again come into play. If you buy a car that gets twice the gas mileage of your last car, you effectively cut your annual fuel bill in half. It's the same as keeping the same car and seeing gas drop back to $2 a gallon. As consumers make the switch to more fuel-efficient cars, demand falls and prices will drop, not temporarily, but permanently (all other things held constant, which of course only occurs in the classroom!).

Finally, we should look at how gas tax dollars are used. Approximately three cents of the 18 cent per gallon tax is used for mass transit purposes, while the balance is paid to the highway trust fund and used to fund highway construction and improvements. It is estimated that suspending the gas tax for the summer would lower payments into the highway trust fund by approximately $9 billion. As that money is spent improving and constructing roads, it is spent on materials and labor providing a significant source of jobs and a material economic stimulus to the economy.

As bad a problem as high gas prices are, we have a greater problem with an economy that is no longer growing and is shedding jobs every month. While in the long run a permanent elimination of the gas tax would result in a shift in jobs to other sectors based on consumers' buying preferences, a three-month suspension is not long enough to allow that to happen.

The most likely economic outcome is simply delaying construction projects for three months, idling workers who would otherwise be working on those projects and delaying expenditures precisely when we need them the most - to stimulate our economy during a time when we are teetering on the brink of a recession.

Steve Tannehill is a managing director with a securities firm and a projessor of business at Pierce College. His column reflects his own views, not necessarily those of the The Signal.


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