The Gas Tax Holiday Explained

The commentariat (including Cato folks and friends) have spent the past couple of weeks sounding off on John McCain and Hillary Clinton’s proposals to suspend the federal motor fuels tax this summer. The commentary has been almost uniformly critical of the idea, and some of the harshest critics have been economists.

Unfortunately, a lot of this commentary seems to be value judgments disguised as economics. Also, much of the economic analysis makes assumptions about the market that may not be correct or that may be offset by other market conditions — but the commentators do not mention (and may even forget) those problems. Put simply, though the idea of a gas tax holiday may be flawed, many of the opinion and analysis pieces on the McCain and Clinton proposals appear to be flawed as well.

Peter Van Doren and I have put together this short paper on the microeconomics of the gas tax. Don’t let the figures and the talk of “elasticities” throw you — the ideas are easy to understand.

The upshot is this: Contrary to many economists’ claims, it’s quite possible that a tax holiday could give consumers some price relief on motor fuels. (This is an economic insight.) However, it’s an open question whether that savings is worth its cost. (Answering that question requires a value judgment.)