Pumping Up: Is a Gas Tax Holiday a Good Idea?

Posted by Patrick O'Connor on 5/9/08 8:45 am

When politicians start jawboning about gas and taxes, about the only certainty consumers can count on is that they’ll get more gas from their political leaders - and probably more taxes, too.

Exhibit “A” this week is the volleying between Hillary Clinton and Barack Obama over a temporary federal gas tax holiday this summer. GOP presidential nominee John McCain and Clinton both support such a holiday, touting it as a way to give beleaguered consumers a few more bucks in their pockets this summer. “Nonsense,” says Barack Obama, who’s dug his heels into the political turf against the suspension of the 18.4-cent-per-gallon federal gasoline tax, calling it a “gimmick” out on the campaign trail. Obama seems to have the bigger megaphone and, so far, the upper hand on the issue, primarily because he has just about every media pundit and economist on his side during this debate.

Thus, the debate begs an economic question: Does a gasoline tax suspension work – or not? And, is there any proof either way?

Actually, there is; and it goes right back to the Illinois gas tax holiday in 2000, and a similar moratorium about the same time in neighboring Indiana. Economic data from the “Illinois experiment” show that the price of gasoline at the pumps declined by three percent in the aftermath of the suspension, while prices climbed four percent after the moratorium was lifted. Economically, that roughs out to a 70% pass-through rate, according to the only scientific study done on the pass-through of the tax holiday savings to Illinois and Indiana consumers. The study, entitled "$2.00 Gas! Studying the Effects of a Gas Tax Moratorium," by Joseph J. Doyle, Jr. and Krislert Samphantharak, concluded that the tax moratorium, by and large, was a benefit to consumers, albeit a marginal one.

For a good "pros and cons" take on the issue, listen to this NPR clip.

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