Gas Tax Holiday: Good Politics, Bad Finance

The federal gas tax amounts to 18.4 cents a gallon. Suddenly, those 18 cents have become a big issue on the campaign trail between Sen. Hillary Clinton (D., NY) and Sen. Barack Obama (D., Ill.).

Cutting the gas tax could help both consumers and transportation companies, like Fedex (FDX Quote), UPS (UPS Quote) or JB Hunt (JBHT Quote). But does it make any fiscal sense considering the U.S. faces massive budget deficits? And should we even care about a gas tax proposal?

The 18.4 cents in taxes goes to the Highway Trust Fund and pays for maintenance of the federal interstate system. According to estimates for fiscal year 2008 by the White House, the HTF will amount to $40.8 billion. Suspending the tax for the three summers months results in a loss of revenue of just a few billion dollars -- a drop in the bucket considering the federal budget of $2.5 trillion. The fiscal consequences are almost nil. The cut would work more as a psychological stimulus for businesses and consumers dependent on oil.

Gas-Tax Debate Doesn't Matter

Consumers, of course, like the sound of the idea after watching prices soar out of control. Sen. John McCain (R., Ariz.) first suggested a gas tax cut. His proposal lacked an offset to the HTF and would lead to cuts in maintenance of highways. As noted, the shortfall proves to be a few billion dollars.

Clinton takes a different route than McCain. She taxes oil companies like Exxon (XOM Quote) and Conoco (COP Quote) to pay for the HTF shortfall, calling it a windfall profit tax on record earnings profits by big oil companies in the amount of $7.5 billion. Extra money would be directed at low-income families struggling with food and gas bills. Her plan has no negative fiscal consequences.