Today's Editorial in the Scranton Times-Tribune details the economics behind Senator McCain's recently proposed "gas tax holiday."
Senator McCain's plan, as the editorial presents, is based on some rather unsound economics. Removing the $0.184 cpg tax may provide immediate relief at the pump, but it would incentivize increased consumption. McCain recommends implementation of the gas holiday over the summer; however, this period is already when demand is at its greatest. A proposal which would increase consumption during an already extended period would not make sense in the grand scheme of things. McCain certainly could make the argument that removing the gas tax would act as a stimulus, and the forgone federal revenue is the consequence of such a stimulus action. However, an economic stimulus which increases demand on such a supply-sensitive good like oil is risky and could pose long-term complications outweighing any short-term benefits.
Economics of the proposal aside, for those who support a gas holiday, it would be more important for states to act. Most states have a larger tax than the federal government imposes. Take Pennsylvania for instance, the tax is currently $0.312 cpg. While not even the largest state levied gasoline tax, Pennsylvania's tax is almost 60% larger than the federal governments. States have implemented such relief independent of the federal government in the past (i.e. Georgia after Hurricane Katrina). Even though the lose of these state revenues may be more detrimental than federal revenue, those looking to lower the immediate price at the pump as priority number one should look at the state taxes first.
Senator McCain's plan, as the editorial presents, is based on some rather unsound economics. Removing the $0.184 cpg tax may provide immediate relief at the pump, but it would incentivize increased consumption. McCain recommends implementation of the gas holiday over the summer; however, this period is already when demand is at its greatest. A proposal which would increase consumption during an already extended period would not make sense in the grand scheme of things. McCain certainly could make the argument that removing the gas tax would act as a stimulus, and the forgone federal revenue is the consequence of such a stimulus action. However, an economic stimulus which increases demand on such a supply-sensitive good like oil is risky and could pose long-term complications outweighing any short-term benefits.
Economics of the proposal aside, for those who support a gas holiday, it would be more important for states to act. Most states have a larger tax than the federal government imposes. Take Pennsylvania for instance, the tax is currently $0.312 cpg. While not even the largest state levied gasoline tax, Pennsylvania's tax is almost 60% larger than the federal governments. States have implemented such relief independent of the federal government in the past (i.e. Georgia after Hurricane Katrina). Even though the lose of these state revenues may be more detrimental than federal revenue, those looking to lower the immediate price at the pump as priority number one should look at the state taxes first.
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