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Will a Gas Tax Holiday or Taxing Oil Companies Help the Economy?

This article was written by in Economy. 24 comments.


To help Americans pay for the increasing price of a gallon of gas, Hillary Clinton is suggesting a suspension of the 18.4 cent per gallon tax on gasoline and 24.4 cent per gallon tax on diesel from Memorial Day through Labor Day while enacting a “windfall profits” tax on the oil companies which have been making money hand over fist through out 21st century so far. John McCain is also in favor of a gas tax “holiday,” but Barack Obama calls this strategy pointless and possibly more harmful for the economy.

Obama figures that the gas tax holiday would save American consumers about 30 cents a day while underfunding the federal fund that pays for road improvements. And while we’re in an election year, Obama points out that Clinton and McCain’s positions are political posturing moves rather than good economic solutions.

Ignoring the fact that when a tax holiday is in practice, gas prices might simply rise to negate the savings and match what consumers are willing and able to pay, the 18.4 cent theoretical reduction in a gallon of gas will be almost invisible. With a gallon of gasoline around $3.60 for me here in New Jersey, this 5% discount doesn’t even bring the price down to its level from a few months ago.

gas pumpsClinton suggests paying for the loss of government income by increasing windfall profits taxes for the oil industry. If there is a gas tax holiday, should oil companies pay for the loss of government income through taxes assessed for earning significant profits in this economy? I feel no pity for the large corporations, and I wouldn’t mind if their taxes increase. However, I don’t think this solution would improve the economy.

As a country, we seem to be willing to continue spending on gasoline no matter what the price, but perhaps that is only because we have little choice. If we stop driving, we stop going to work, earning money, and feeding our families. We’re ready to spend as much on gasoline as necessary to continue our lives, giving oil companies the freedom to keep pushing prices upwards.

The oil industry obviously is not happy about the idea that their profits could be taxed, claiming that taxes would eat into available capital for new production, but their profits are mostly used for buying back stock rather than research and development.

Rather than Clinton’s plan to tax oil companies, McCain wants to freeze or cut spending to pay for the gas tax holiday. Obama thinks these suggestions sound nice to voters but would have little real effect. What do you think?

Photo credit: x-eyedblonde
Obama attacks Clinton’s gas tax plan [AP]
McCain calls for a summer ‘gas-tax holiday’ [AP]
Taxing oil profits: Proceed with caution [CNN Money]

Updated December 20, 2011 and originally published May 7, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 24 comments… read them below or add one }

avatar Chris

I don’t know the details of this proposed tax holiday, but assuming it’s like the typical sales tax holiday, then no it won’t help the economy one bit. The tax would go away for 1 or 2 days, everyone would try to fill up their tanks on those days, the demand would soar, and the price would soar to compensate. (That is, unless the gov’t interferes and sets price limits, then the gas stations would run out because people have no incentive to stop buying.) It’s simple supply and demand economics. The only way gas prices will go down is when demand goes down. And demand will only go down when Americans adjust their lifestyles to use less gas. This will not be an overnight change – it’s too much a part of our lifestyle. It will have to be a gradual change.

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avatar Tank

“And demand will only go down when Americans adjust their lifestyles to use less gas.”

And this will happen when there are more viable gas-fuel alternatives for consumers (i.e. natural gas, compressed air, (gulp) ethanol, biodiesel, etc.)

The future is choice!

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avatar Kevin

I agree with Chris, this is simple supply and demand; when the demand goes down, the price will go down. We also need to realize that America by itself does not control the demand for oil. Demand for fuel is going up all over the world and that affects the supply and price here.

Everyone continues to complain about gas prices, but nobody is willing to give up their giant SUVs. Very few people actually need this kind of vehicle. I’m not saying that everyone needs to go out and buy a little compact car, but it’s an irrational argument when you’re driving a vehicle, by choice, that gets 12 mpg.

The proposal for a gas tax holiday would not do anything to ease prices or help the economy. I don’t know if I will ultimately vote for Obama, but I commend him for not jumping on the bandwagon and using a dumb idea for political gain (that already happens enough as it is).

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avatar Colin

My thoughts:

We messed up a LONG time ago. Now we are scrambling for a short-term solution to a long-term problem.

1) The gas tax removal is a worthless and purely political move to gain last minute voters. I agree that it will damage our economy more than it will help it.
2) Taxing big business will do NOTHING. People assume that corporations contribute to the tax revenue of this country but that is absolutely wrong. Those costs are passed on directly to the consumer; always have; always will.
3) We don’t have the infrastructure in place to “adjust our lifestyles.” I live in a large city (1.3 million) but we have no trains or subways and our bus system uses the same lanes as normal traffic (no HOV lanes).

We can thank the short sightedness of our previous leaders for the pickle we are in today.

(*steps off soap box*)

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avatar Master Phu

I think that if we want to get off of our dependency on oil and high gas prices the change has to come from all three factors to the economy.

Consumers have to choose to buy cars that get better mileage, carpool, or use public transportation. The only way to spur this change is with the high gas prices so I’m actually in favor of the high prices.

Then we have to give incentives to manufacturers to develop cars that use alternative fuels (or disincentives for manufacturing gas guzzlers). If we change their profit margins, companies will naturally change to where the larger profits are.

Third the government needs to help build out the infrastructure for the deployment of these alternative fuels. It’s all good to say that so and so technology is better for the environment but if I can’t find it when I need to fill up it doesn’t do me any good.

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avatar Someone else

John McCain was the first to propose the holiday gas tax not Hillary. I do not agree with the holiday gas tax because it will not save me enough to make a difference along with most likely screwing people out of jobs later on. I think raising taxes on the corporation’s profits is pure crap. Just because someone comes up with an idea to make money the government has to tax them more? What is the government going to do with the extra tax money? Spend it on crap we do not need (ie, Homeland Security)? I do not care if oil prices go up. If inflation is killing you, then go back to school, get a degree, and get a better job! Guess what!? That is what I am doing! HAHAHAHA! Also budget your damn self, do not live paycheck to paycheck.

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avatar Customers Revenge

I agree with the prior commenters. Reducing taxes to increase demand at a time when demand is already very high is completely ridiculous; exactly the opposite of what should be done.

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avatar Kevin L.

The problem of a “tax holiday” is beyond the issues/problems stated previously. A holiday or temporary decrease has been proposed by my home state, Texas, and I’m sure other states have suggested the same thing.

Supposing such a step were accepted/enacted, what happens to the programs that rely on this tax revenue base? No one ever mentions who’ll pay downstream. And more than likely, it’ll be all of us – either through a lowering of service levels or increased prices (and there will be nothing “temporary” about a price increase).
Supply/Demand really seems the best way for us to deal with this issue.

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avatar matty dread

this is a great idea!

and then to get rid of all the guns and violence, we could have a gun amnesty day….where you can BUY a gun without filling out all the paperwork and having background checks so you can DEFEND yourself against all the people with the guns!

the answer to the gun problem is to put more guns on the street, just as the answer to our gas problems is to make gas cheaper!!

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avatar Kevin

Oil should be a public utility. Natural gas, electricity, water… the staples of American life… are all regulated utilities that are allowed to earn a profit but not an outsize profit.

What do you think?

Also, I think the tax holiday is ridiculous and stupid. It will simply increase demand, raise prices, and to boot also increase pollution.

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avatar UH2L

The gas tax holiday is a stupid idea, just like reducing taxes, (especially for the rich), when we have a huge deficit and/or are in a war. I commend O’Bama for not pandering to get votes.

I wrote about this in my blog too. I said “Gas prices too high? Use less gas.” It’s that simple. We can’t control what others do, but those who guzzle make our prices higher so we have a right to be upset with them. People in emerging markets are just trying to live as we do and it’s ironic because they’re mostly buying vehicles that industrialized countries are selling them.

A stationwagon can meet the needs of at least 60% of SUV owners’ needs and a minivan for abou 30% of the others, but people are generally not so smart, and they can be insecure about the possibility of driving a wagon or a minivan. Many of them just like to sit up high, but others think they will be safer at others’ expense.

In the end, it will take time for people to come to grips with reality. Our government did little to move us towards better efficiency. Now they have had to with increased CAFE fuel efficiency standards.

UH2L

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avatar tom

Essentially what America needs is an effective Energy Plan. We are running off in 100 different directions, but have no clear plan, ethanol is a perfect example. We built this HUGE ethanol infrastructure only to let it go to waste.

We say we want to be independent of foreign oil, but we have no idea or plan to get there. Alternative energy is fantastic, but how are we going to use that to cut into oil usage? At the rate that’s going in 200 years we’ll be at 50% of energy production.

The government needs to do a lot more for its citizens. Add incentives to every energy efficient item you buy. Don’t let the hybrid tax dwindle down to nothing. Start giving huge tax incentives to companies that can provide proven energy reduction results.

Our fuel consumption is nothing compared to what we use to power our lives. The demand for oil in fuel is trivial compared to power plants.

The key to reducing fuel prices is to reduce oil usage around our lives.

You may have your soap box back…

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avatar Damien Vu

Instead of a temporary gas tax holiday, how about providing rebates for electric conversions. A typical conversion might cost around $5k. Let’s tax the oil companies and make them pay for half of that. Wouldn’t that be ironic? I know it’ll never happen, just daydreaming.
A more realistic idea would be to give people an incentive to buy cars with better MPG, ie. make the sales tax inversely proportional to the MPG.

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avatar Jim

Kudos to Barrack for not committing to a failed from the start policy. I used to be a McCain fan, but if this was his idea, I think he’s fallen off his rocker.

Gas might go down for a day or two on Memorial Day, but as soon as the next worker strike or government intervention with a refinery flashed across the news, the price would go up and you’d have no clue if you were still getting your tax holiday or, more likely, lining the pockets of your favorite oil company.

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avatar James

If the gas tax is such a good thing, why not make it doubleplusgood at 36.8¢/gal? For all those in favor of keeping the gas tax, what is the right amount of tax and why?

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avatar Matt

James -

The answer is MUCH higher. Europe gasoline taxes are much higher (http://gregmankiw.blogspot.com/2008/05/graphic-for-pigou-club.html). They need to be higher to offset the negative externalities imposed by driving that those NOT driving are often bearing the cost of. For example, road construction, upkeep, state highway patrol, ambulances for car accidents, pollution cleanup, etc. should all be funded by people who use the roads, and the best way to collect that tax revenue would be through a use tax – a gasoline tax. (Right now alot of those costs are covered through sales tax, income tax, property tax, etc.)

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avatar TiredOfIt

Kevin says Oil should be a public utility. Natural gas, electricity, water… the staples of American life… are all regulated utilities that are allowed to earn a profit but not an outsize profit.

Finally, someone with some sense!! I don’t understand why the government has not done anything to regulate the astronomical profits of the oil industry before now. I really resent paying nearly $4/gal and then hearing about the record billions of dollars profit the oil companies are making.

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avatar pirategold

The flaw in your logic is people have to drive a certain amount to do what they do, and preaching anything different is a waste of time. I drive to work and back, and will continue to do so. I think trying to change peoples independent driving decisions is too big a challenge. Technology, rebates, and corportate greed are really what need to advance and change in my view…

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avatar deepali

Driving is not inevitable. I know plenty of people who live without cars. It’s not convenient, sure, but really, get over it. Unless you live in a place with no public transportation whatsoever (and people do), you *could* do without a car.
But, if you’re going to own one, then at least be conscious about it. Good gas mileage, drive the speed limit, etc.

All that aside, oil is not just used to make cars move. It’s also used to grow and transport food. Another way to greatly reduce our “dependence on foreign oil” is to stop eating meat and to eat more locally produced food (would have an even greater impact than driving less!). I suspect that’s a harder hurdle for most people.

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avatar UH2L

Deepali,

It’s true that driving is not inevitable, but I love to drive. So I drive a relatively efficient vehicle and live close to work. One problem is that modern white collar jobs don’t always allow for fixed time public transportation. And in most suburbs, you need a car.

I’m all on board with not eating meat to reduce oil consumption, wish more people would consider it. Plus there would be less animals that would suffer. I have to try to do more of the locally produced food thing.

Atul

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avatar FrugalDoug

I have a whole different perspective on this. Instead of blaming the oil companies (which are mostly passing along the higher costs of crude), make the market work for you. INVEST in the oil companies. If they are truly gouging us, then that will show up on their bottom line, and you will receive a dividend for your wise investment (or a rise in the stock price). You can also encourage your employer to sell to the oil companies, if you have a service they need.

I am buying ethanol for one of my vehicles. It’s cheaper, but because of the lower MPG, it works out the same in terms of $/mile. The BIG difference is that when I fill up with E85, at least 85% of the money stays in the US. I really hate the idea of sending another $50 to the Middle East to invest in that mess. Yes, it raises the price of food, but it’s an elastic relationship. The farmers that are making money are reinvesting it in new John Deere equipment, which is employing lots of people in the US.

Although it’s true that driving less will reduce demand and should lower the price of gas, I’m afraid that we’re seeing a price elasticity of less than 1. If Americans cut their consumption by 10%, I think there are more than enough Chinese and Indians ready to pick up the slack, and that will keep the price high.

What annoys me is that I am typing this at a hotel in Orlando, and when I checked in and went into my room, the air conditioner was running on high and set to 60 degrees. They are using high-flow shower heads, etc. Until we start getting some common sense about energy use, we’ll never get out of this mess.

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avatar susan

For all of you how want to tax the “evil oil corporations” consider the following:

New study finds ownership of America’s oil and natural gas companies “broadly middle class”

WASHINGTON – Who owns ‘Big Oil?’ It’s not who you think. As Congress debates national energy policy, a new study finds that ownership of oil and natural gas company shares is made up of a broad cross section of Americans.

“This study disproves the popular misconception that ‘Big Oil’ is owned by a small group of industry insiders. In reality, across the oil and natural gas industry only 1.5 percent of shares of public companies are owned by company executives,” said study author Robert J. Shapiro, undersecretary of commerce for economic affairs under President Bill Clinton. “The data show that ownership of industry shares is broadly middle class, with the majority of industry shares held by institutional investors, often on behalf of millions of Americans through mutual funds, pension funds and individual retirement accounts.”

API Chief Economist John Felmy added: “When politicians seek to punish these companies and ‘take their profits,’ they are not targeting industry executives but the hard-earned savings of working people.”

Get educated!

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avatar Luke Landes ♦127,535 (Platinum)

Susan: That information is completely irrelevant to the discussion. Taxing oil companies for excessive profits will have hardly any affect on the “hard-earned savings of working people.” I’m not saying additional taxation is the right solution, but any argument against it must be sensible and not resort to scare tactics like, “Don’t tax the oil companies, you’ll hurt millions of Americans!”

I have investments in oil companies through index mutual funds… The average executive of an oil company has more ownership than any one average American individual.

Ownership may be “broadly middle class” but the middle class is not getting rich off the oil companies… those with larger concentration of investment in oil are.

I’m not sure who you’re telling to “get educated,” but here’s some better advice. Don’t only “get educated,” but use analytical reasoning rather than spitting out statistics regardless of relevancy. Think beyond the numbers.

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avatar Dan Walter

A “windfall tax” on the oil companies is as lame as a “tax holiday.”

Tax the oil companies more and you rob MILLIONS OF PEOPLE of rightful income. Plus, you won’t do a thing to lower the price at the pump. In fact, history shows .. the reverse is true.

No one in government is talking of the BILLIONS UPON BILLIONS OF DOLLARS being taken out of the oil companies’ coffers in the form of CORPORATE TAXES.. anyone remember those taxes?? You’re paying for them at the pump so you should get to understand them!

The truth is, government created this problem. When one looks past the moronic statements, into the heart of the matter, the oil exes aren’t the bad guys anymore… YOU elect the “bad guys” by thinking any of these people have real solutions.

The Democrats tell us we can’t Drill our way out of this problem (great thinking Ms Pelosi) and the Republicans tell us we can’t TAX our way of the problem. What’s left? Something Washington doesn’t understand, it’s called INNOVATION.

After all, it was innovation that made Bill Clinton’s “surplus” possible, NOT the Democrats. The real trick is to get government to stand down, out of the way, so the real thinkers can get to work without their foolish hindrance.

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