Not Laughing at McCain’s Gas Tax Holiday

I, too, am flabbergasted. Not, mind you, by Senator John McCain’s proposal to suspend collection of the federal excise tax on gasoline temporarily so as to ease the pain of driving to the beach this summer. Rather, I am stunned to learn that Robert Poole (an otherwise insightful contributing author to the recent Independent Institute book on road transportation, Street Smart) thinks it’s a bad joke on American drivers, who would save a few pennies at the pump, but might end up blowing out tires on the Interstate because there won’t be enough money in the Highway Trust Fund to fix potholes.

As Mr. Poole knows well, the highway “trust fund” is about as trustworthy as the Social Security account supposedly holding the “contributions” deducted from your paycheck to finance your public pension. Indeed, as he admits, the balance in the fund is expected to be in the red by $2 to $3 billion in 2009 because Congress already has authorized more highway spending than will be covered by anticipated gasoline tax revenues.

Surprise, surprise! As is examined in depth in the Institute’s book that I edited, Taxing Choice, transportation programs at the federal and state levels of government are hotbeds of political corruption and poster children of pork-barrel politics. How can Mr. Poole, or anyone else for that matter, imply with a straight face that the Highway Trust Fund is managed on the basis of sound benefit-cost principles? To the extent that gasoline tax revenues actually are used to fix potholes, you can bet that priority is given to the ones located in the districts and states of powerful members of the transportation committees in the House and Senate, and that other highway construction and maintenance projects financed by the gas tax are doled out to buy votes in electorally important constituencies.

Sure, the federal tax is a trivial fraction (about 5%) of the cost of a gallon of gasoline nowadays and, because some of the tax burden is borne by producers, not all of the savings from a tax-collection holiday will be passed on to consumers in the form of lower prices. But given that the demand for gasoline is relatively inelastic, at least in the short run, consumers will capture most of the benefits of a temporarily lower federal tax. Small savings are not to be sneezed at, even so. Weekend sales tax collection holidays prior to the start of the school year have been declared recently in several states to reduce parents’ out-of-pocket costs of buying clothing and school supplies. Retail sales boom as a result. A local purveyor of adult beverages in Oxford, Mississippi, advertizes the first Tuesday every month as “Tax-less Tuesday” and pays the 7% state sales tax on all purchases. She grosses 30% more than usual on those days.

Mr. Poole may have a different take on the tax holiday idea than Senator McCain’s critics on the left, who are thrilled to see high gas prices because they are both consistent with a green political agenda and provide opportunities for demonizing the oil companies. But the proper conclusion to draw from recognizing that federal transportation programs have been politicized and transformed into “a New Deal-style public works boondoggle” is not that a temporary tax holiday is laughable. The holiday should instead be made permanent.

William F. Shughart II is Research Fellow and Senior Fellow at the Independent Institute, the J. Fish Smith Professor in Public Choice at Utah State University, past President of the Southern Economic Association, and editor of the Independent book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.
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