Suspending Federal Gas Tax Is Bad Idea

With voters clamoring for relief from skyrocketing prices at the gas pump, politicians are floating a wide range of quick-fix solutions, a number of of which could cause more problems than they solve, suggests Paul Rothstein, a specialist in the economics of public spending at Washington University in St. Louis.

"It makes absolutely no sense to suspend the federal gasoline tax, even if you think that the reduction will be passed along to the consumer," says Rothstein, an associate professor of economics in Arts & Sciences.

"The federal gas tax money goes mostly to repair and expand the highway system. The highway system, begun in the 1950s, is crumbling and the nation is going to need billions over the next decade to repair it. Even people who don't want the highway system expanded want the roads we have to be safe. Now is not the time to reduce this revenue."

It's questionable if reduced gas tax translates to consumer saving.

Eventhough the proposed federal gas tax "holiday" has been touted as a means of off-setting the rising price of gasoline, Rothstein cautions that there's no way of knowing whether this reduction in fuel costs will be passed along to consumers.

"People think that an increase in the tax rate gets passed along to consumers, but they do not think that a tax cut would also be passed along. Under perfect competition, the first situation implies the second situation must be true. But since most people don't follow that logic, they must really think that producers manipulate the market," he says. "This certainly happened in the California energy crisis, but the manipulation would be harder to organize at the national level. That said, it could be happening."

No one can say for sure right now whether producers are manipulating the market for gasoline, just as no one knew that energy traders (including Enron) were manipulating the market for electricity and natural gas in California five years ago, Rothstein says.

"Those companies used some sophisticated trading strategies, and in some cases deliberately lost money in commodity markets in order to make even more money on financial assets whose value was tied to the commodity prices," he explains. "The point is simply that the big profits from manipulation need not be in the obvious places to look. Gasoline producers are not manipulating the price of oil itself, and the price of oil has been rising, but whether the run up in oil prices justifies the run up in gasoline prices is a question no one will be able to answer for a while."

What proposals should America be considering?.

"As an economist, I think the right solution here is for the oil companies to feel pressure to share their wealth, but not in ways that encourage driving," Rothstein says. Tax breaks and subsides only encourage consumers to drive more and use more gasoline, while doing little to encourage cleaner, more renewable fuel alternatives. It makes no sense to erode the gains in clear air made over the past thirty years."

Rothstein supports grassroots efforts to push oil companies to be good corporate citizens and share their gains with people other than their stockholders. But he warns that taxes on windfall profits of large oil companies can have unexpected and quite negative long-term implications; potentially decreasing the amount of oil available to consumers in the future, and eventually leading to even higher prices down the road.

"Bill Gates got the message when Microsoft was threatened with a breakup, and now he spends billions on health care in Africa," says Rothstein. "Let the oil companies fund schools and health care and basic research and whatever else. But keep the pressure on the individual consumer to buy a fuel-efficient car and drive less."



Posted by: Edwin    Source