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Gas Tax Holiday: Good Politics, Bad Finance

A temporary gas-tax cut makes political sense, but how about fiscal sense?
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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

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,

UPS

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or

JB Hunt

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. 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

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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.

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Clinton takes a different route than McCain. She taxes oil companies like

Exxon

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and

Conoco

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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.

The risk of Clinton's plan, and to a lesser extent McCain's, would be that oil companies just raise prices. This could negate the benefits of a cut.

New York Times

columnist and economist Paul Krugman aptly described Clinton's gas tax proposal: "So it's pointless, not evil."

If the gas tax cut is pointless, why has it gotten so much attention? Clinton and Obama have many similar proposals. Once Clinton proposed a gas tax cut, the Obama campaign saw a chance to attack her populist proposal. The

media jumped on board

finding absurd reasons to pillory Clinton, and McCain to a lesser extent.

Unfortunately, most of the analysis has been off base. Most members of the media have no understanding of how oil markets work or what affects prices. It seems nobody has considered looking at the demand side of the picture. Gasoline demand has remained static. According the Department of Energy

Web site

, demand has been flat:

"Over the last four weeks, motor gasoline demand has averaged nearly 9.3 million barrels per day, up by 0.4 percent from the same period last year."

"Gas demand is about flat year over year and has been flat for two or three years," said Jim Williams, an energy economist at WRTG Economics. "The 0.4 increase actually represents Americans drive less because the increase of ethanol content in gas lowers driving efficiency."

The Department of Energy reports here that the U.S. has built up

excess inventories

since the beginning of the year: "Gasoline inventories built to unusually high levels in early 2008, indicating an excess of supply relative to consumption." Some of those inventories have been reduced because refiners cut back. Most analyses fail to understand refiners have been under pressure and have little or no profit margin in refining oil at these prices when refining capacity remains in the low

80 percentile

.

An 18-cent decrease in the price of gas is minimal. With retail gas prices and petroleum prices reaching all-time highs, a small decrease in the price rates to have little effect on demand, and supply appears sufficient based on inventories. Summer drives might actually enjoy some benefit.

This argument was made further in an

article

appearing at

Salon.com

by George Frost. The author notes Obama supported a similar proposal to cut state gas taxes while in the state Senate in Illinois. Obama now says he regrets voting for the measure. But the only study of the gas tax cut showed that consumers benefitted some at the pump.

In the end, the gas tax cut would have little fiscal consequence and could help some struggling consumers at the pump. It's an innocuous idea that the media has mistakenly analyzed and overblown.