The Gas Tax Ruse

Hillary Clinton has joined John McCain in calling for a three-month suspension of the federal gas tax. Unfortunately, this proposal is a just a campaign gimmick.

The federal gas tax is 18.3¢ per gallon. Based on national averages, the typical driver consumes about 50 gallons a month, and thus pays about $9.00 gas tax per month.

bill-hillary-money.jpgHillary, ever the queen of chutzpa, hopes voters forget that in 1993, the Clintons’ highest priority for their new administration was an assortment of tax increases, including a 4.3¢ increase in the gas tax. At 50 gallons per month since 1993, the typical driver has paid about $360 additional gas tax, thanks to the first Bill & Hillary administration.

Senator McCain should use high gas prices as an opportunity to point out the harm done by emotionally-driven, populist politics. One of the Left’s populist themes has been the myth that gasoline is somehow immune to the market forces of supply and demand, that greedy oil companies can and do set prices as high as they wish, and hapless consumers will continue to buy the same number of gallons.

In reality oil companies, like most businesses always seek to maximize profits. But they are always subject to the constraints of the market forces of supply and demand. Consumers do react predictably, by buying less when prices are higher and more when prices are lower. This week, the price of gas is about $3.60 because that’s the price at which consumers will buy all the product the oil companies can deliver this week. If the companies set the price at $4.00, or $5.00 or $10.00, consumers would buy less and a surplus of unsold gasoline would build up, reducing profits. If they set the price at $3.00 or $2.60 or 99¢, consumers would buy more, and supplies would run out before all consumers bought as much as they wanted, and again, profits would be reduced.

What would actually happen if the 18¢ tax were suspended? The oil companies would have two options:

1. reduce the price by 18¢. Consumers would buy more and supplies would run out before all consumers bought as much as they wanted. There would be a “shortage.”Or,

2. if the oil companies wanted to prevent a shortage they could hold the price at $3.60, and the 18¢ would become additional profit.

Either way, Democrats would embark on one of their emotional, logic-free rampages and a lot of voters would be persuaded that Oil-Co “greed” had undermined the “hard work” of Senators and Congressmen to “help” the people. Legislation would be introduced to whack the oil companies with new taxes that would, as always, be passed on to consumers.

Senator Obama gets half-credit for pointing out that the tax reduction would be insignificant, while not honestly discussing – or not understanding – what would actually result from suspending the tax.

None of the candidates has addressed the ways government has helped cause high gas prices.

1. The supply of gasoline is less than it could be because there is not enough gasoline refining capacity, because legal and regulatory restrictions have prevented construction of any new refineries for three decades. All existing refineries run at 100% of capacity, all the time. When a refinery must shut down for maintenance or repairs retail prices spike up immediately.

2. The supply of crude oil is less than it would be if the government had not barred the oil companies from drilling and expanding domestic production for several decades.

1 Comment so far

  1. aaa again on May 1st, 2008

    I believe that the oil company profit is approximately 12 cents per gallon, making it 2/3rds the government’s take.

    Government apologists will respond “yes, but the government needs to take care of the roads.”

    OK. And the oil companies need to provide a return on their existing capital, and provide capital for re-investment.

    Otherwise there will be no new drilling or refining capacity to supply our needs. Wait, those wise politicians have legislated that out
    of the equation, haven’t they?