Obama Wrong On Gas Tax
May 5th, 2008 at 10:51 pm by Susie
I really loved the outrage over Clinton’s comments about economists when it wasn’t so very long ago that the majority of them were still insisting the economy was In Great Shape and there was no recession, nope, everything was fine and getting better. But then, I’m not invested in protecting the academic class, which gives me a lot more intellectual freedom:
While an Illinois state senator, Obama supported a state tax holiday very much like Clinton’s proposal, but without the saving mechanism of a windfall profits tax.
CBS News says Obama voted for the temporary lifting of the tax three times in the state Senate. The tax holiday was finally approved during a special session in June of 2000, when Illinois motorists were furious that gas prices had just topped $2 a gallon in Chicago. The moratorium lifted the state’s 5 percent sales tax on gasoline through the end of 2000.
Obama told constituents that gasoline prices would drop: “Gas retailers must post on each pump a statement that indicates that the state tax has been suspended and that this temporary elimination of the tax should be reflected in the price per gallon of gas.”
During one state Senate floor debate, Obama joked that he wanted signs on gas pumps in his district to say, “Senator Obama reduced your gasoline prices.”
Now, running for president, Obama says the tax reduction was a complete failure, and that “the oil companies, the retailers” ended up benefiting most because they raised prices by the entire amount of the tax cut.
“I voted for it, and then six months later we took a look, and consumers had not benefited at all,” Obama said. Having learned this hard economics lesson from his Illinois “mistake,” Obama now argues that a federal tax holiday also will fail for the same reason — the oil companies will take it all.
But Obama is wrong. He did not learn this lesson. In fact, the only scientific study done on the pass-through of the tax holiday savings to Illinois consumers (and those in Indiana, as well, whose citizens enjoyed a similar holiday) found that it actually worked to a large extent.
The study is titled “$2.00 Gas! Studying the Effects of a Gas Tax Moratorium,” by Joseph J. Doyle Jr. and Krislert Samphantharak. Download the PDF here. The authors concluded that “the suspension of the 5% sales tax led to decreases in retail prices of 3% compared to neighboring states. And when the tax was reinstated, retail prices rose by roughly 4%.”
This suggests that the tax holiday delivered at least 60 percent of the tax savings to motorists.
The economic basis for attacks on the Clinton tax holiday is a fundamental economic theory called “tax incidence.” It says that the cost of a tax on any consumer product will be borne by those with lesser “elasticity” in the tug of war between suppliers and consumers. “Tax incidence” falls mostly upon the group that responds least to price — the group that has the more inelastic price-quantity curve. In this instance, assuming that the supply of gas is pretty much fixed, it means consumers will end up paying those missing tax dollars directly to the gas companies in the form of higher prices. The increased demand triggered by the price cut will supposedly lead drivers to bid up the price of gas, swallowing the tax cut.
But this is not what happened in Illinois and Indiana back in 2000. And there are factors at work today that might provide equal or more “elasticity” to the producers, and prevent consumers from paying the price for the tax cut.
Gasoline inventories are currently very high, and these surpluses can absorb much of any increase in demand. (See here.). Should gasoline consumption surge still higher, in the short run, refiners can also divert enough of the crude oil meant for other products — diesel or jet fuel, for example — into gasoline to meet demand.
On the demand side, let’s face it: This is a tiny price cut. It is not likely to spur demand much beyond the usual seasonal increase in driving. And if oil companies do what Obama says they will do — jack up prices to cover the tax — there would be no incentive at all to drive more.
The media has attacked the Clinton plan for not being supported by the think tanks and economists. But there are a few economists out there — such as Bill Polley — who point out that if short-run demand is also inelastic, it is “not a foregone conclusion that the suppliers will get all the benefit.” In fact, Polley concludes that consumers would get a nickel a gallon or more benefit — not much, but better than nothing.
What about the charge that Clinton’s summer tax holiday will spur consumption, leading to sharply higher long-term demand, thus crippling our efforts to conserve? Well, the economic literature suggests otherwise.
Basically, it is absurd to say that a summer-long price drop of this tiny magnitude will have any long-term effect at all. A meta-study by Molly Espey of 101 different economic studies, published in Energy Journal, found that in the short run (defined as one year or less), the average price elasticity of demand for gasoline is only -0.26. That is, a 10 percent hike in the price of gasoline lowers quantity demanded by 2.6 percent. As long as the price stimulus is small and short-lived, there is little if any long-term effect. And most experts agree that in order to actually curtail demand through taxes, it would take a much higher tax than is politically feasible.
Not one of the three major presidential candidates is calling for a $2 or $3 a gallon tax increase. The better long-term approach — given the lack of political spine by any U.S. politician on this subject — is higher efficiency standards, and big-time investment into transportation alternatives. Both Obama and Clinton are pushing these.
Finally, Obama says the gas tax holiday would cost thousands of construction jobs and lead to crumbling roadways and bridges. But if Clinton replaces the lost revenue with a windfall profit tax on oil companies, as she insists is necessary, then there would be no harm to our infrastructure repair work.
Many — including Clinton backer and economist Paul Krugman — have questioned whether Clinton’s proposed windfall profits tax would work: “In one pocket, out the other. So it’s pointless, not evil, ” says Krugman. “But it is pointless, and disappointing.”
But under Clinton’s plan, if properly implemented, any additional profit realized by an oil company by passing on the cost of the windfall profits tax to customers would also be subject to the tax. This means a dollar passed through to consumers to offset the tax would appear as profit … and be taxed.
How to enforce this? Make it against the law for oil companies to pass the price of the windfall profits tax on to consumers, and then audit the oil companies’ books. It is not a difficult accounting exercise to tax excess profits above a certain gross percentage per barrel of oil, or gallon of gas. Every major oil company has sophisticated profit segmentation reports that go to the very senior management of the company. These reports identify revenues, costs and profit at each level of the vertically integrated operation, broken down on a per barrel basis by product type, marketing region, you name it.
The oil companies also will have a powerful inducement to avoid being caught — and in this kind of toxic political environment, they may actually swallow the tax.
But it takes a little bit of courage to take them on, and a belief that we do not always have to be victims. Obama — where is your optimism?
When a study uses waffle words to introduce their findings like “The estimates here suggest” and at the same time does not give confidence intervals for any of their estimates, it probably is not sufficiently rigorous to believe with any degree of certainty.
Additionally this report scatters caveats throughout about market conditions and includes stated assumptions around supply and demand forces not acting independently to drive price changes. They certainly have not studied anything even remotely approaching the price drivers from the rapidly increasing demands in China and other developing nations.
If that’s not enough, they also state several waffles around the fact they they used limited time frames and list other weaknesses in their comparative data sets.
In any case Hillary knows perfectly well that neither the tax holiday nor the windfall profits tax have a snowball’s chance in hell of becoming law.
The desperate nature of her extreme pandering and the utter hypocrisy of her new “I want to be more and more and more like McCaine” ploy is a bit frightening. She’s not dumb enough to not realize that she is pushing an idea that will never work, but she pushes away in order to buy votes from unsuspecting shills.
She does not even appear to be making any real effort to even get the bill she introduced passed. I wonder if she and Bill privately laugh at the voters and contributers they are conning with this act.
I get it…since they didn’t put Obama’s slogan on all the gas pumps, it was all for naught.
OK - this time Senator Obama, if we put your silly tag on all the pumps across the country can we count on your vote again?
Ignoring the fact that he previously voted for this type of measure, you simply can’t ignore Obama’s comments on the working class ‘bitter’ people who ‘cling’ to guns and their religion and then piled on by Axelrod who gets on NPR and says that the working class white people don’t vote for Democrats anyway…it’s no accident that Obama lets everyone else pander to the populist issue (remember that this concept of gas tax holiday was originally floated by McCain).
Obama is intent on pissing off enough voters in this election to make his collapse legendary.
If the gas tax cut is $0.18 and consumers see about $0.05 as a benefit, the majority of the cut is still benefiting the oil companies. That leaves aside the question of lost revenues. If the gas tax holiday is intended for this summer, there is no way that a windfall tax would be enacted. In a Clinton administration, it might have a shot.
There’s a disclaimer missing concerning who authored this article. George Frost of Berkeley, California. A lawyer. Not an Economist. Not a research analyst. Just a commenter who thinks he found something really damning, but in fact doesn’t understand what it does and does not actually say. Oh Yeah, and he’s a Clinton contributer and supporter. Oops, forgot to mention that didn’t we? Our bad - not intended of course.,
This appears to be the best response Clinton supporters could muster. It’s pathetic.
Oh and that supposed “gottcha” that some folks seem to think they have “discovered” about Obama voting for such a program in Illinois? He talked about that and it’s failure to produce results as a reason for his current position. See, that’s what mature adults do when they make a mistake - they admit the mistake and learn from it (sort of like Edwards did with his vote to authorize the Iraq war). I realize that’s hard to recognize this after so many years of Bush-Clinton-Bush, but it’s time to look beyond the entitled class for our leadership.
Obama has proposed a program that gives many times MORE money back, especially to the poorest folks:
“Supports windfall profits tax on oil selling at or over $80 per barrel. Proceeds from the penalty would go toward relief mechanisms for consumers, funding and expanding LIHEAP”
Hmmm, seems like someone poor enough to need LIHEAP might prefer hundreds of dollars towards their oil bill over that $30 from the “gas tax holiday”.
Why do Clinton supporters want to piss ion the poor people like that?
nothing better than watching a bunch of desperate folks who criticize others for the use of right-wing language and memes fall back on that limbaugh/hannity/et al classic:
“HE’S A FLIP-FLOPPER!!!!”
really, its priceless.
and trolly mctrollerson, oh great defender of the white race and proletariat, we still await your explanation of HRC’s famous “screw ‘em” comments…
http://tinyurl.com/4uxet3
George Frost is a member of CivicActions and serves as its General Counsel, advising the firm on the full panopoly of legal issues, as well as taking an increasingly active role in client development and strategy.
George worked for more than a decade as a reporter and editor for a variety of “old media” publications, including the San Francisco Examiner, Anchorage Daily News, and Newsweek. Upon obtaining his law degree from the University of California Hastings College of the Law, he joined a San Francisco law firm (later merged with Perkins, Coie), where he specialized in complex litigation, IP and media law. Among the firm’s clients were the Hearst Corporation, Gannett, NBC Dateline, as well as various “new media” startups. In 1998, George was named “Rainmaker Associate” by National Jurist’s Associates Magazine.
George left Perkins, Coie in 1999 and joined with Spencer Hosie to form the successful boutique law firm Hosie Frost Large & McArthur, where his practice focused on antitrust and other complex business litigation, IP, and media/new media matters. Recent major representative matters include: State of Louisiana v. Chevron U.S.A., a royalty fraud trial on behalf of the State of Louisiana that resulted in a $111 million jury verdict against Chevron, and Burst.com v Microsoft Corp., an antitrust and IP action in which he assisted in obtaining a $60 million settlement with Microsoft. George recently resigned as a partner at the firm and is continuing a solo practice advising startups on IP matters.
George has been an Adjunct Professor at the University of San Francisco Law School, where he taught media and new media law, and recently served as special counsel to the California Senate Judiciary Committee. He remains active in First Amendment and other issues.
just curious - why does obama get kudos for his “mature adult” behavior changing his view on the gas tax but clinton gets endlessly derided for her position on iraq? and edwards gets a pass on that but not clinton?
and obama’s not the only one proposing windfall taxes on the oil companies.
Changed your mind from the earlier post?
IIRC, Indiana HAD a state gas-tax holiday a few years ago; it would be interesting to see what the result of that was. But even so, the supply situation has tightened considerably over the past couple of years, so there’s good reason to doubt that a gas-tax holiday would benefit consumers.
And really: it would be much, MUCH easier to get the gas-tax holiday passed than to get the compensating profits tax passed. In fact, I’d expect the GOP to let the gas-tax holiday sail right through congress, but obstruct and use a profits tax as a rhetorical club for the general election (”See! They want to raise taxes!”).
So please explain: how does a gas-tax holiday increase supply or reduce demand?
AFAIK the current bottleneck in gasoline is refinery capacity. Several refineries in the Gulf got trashed by Katrina and other hurricanes, and I don’t think they ever came back on line, and the oil barons aren’t in any great hurry to expend any of their profits on new refining capacity in a probable peak oil situation. So American refining output is tapped out, and supply and demand rear their ugly heads, and gas at the pump will find its market-clearing price. This is what Krugman and the other experts are saying. This is also not the state of play in 2000.
Of course, everything I think I know about this comes from the same old corruptable sources, so it could all be hogwash.
Information is posted showing the author of the article is not an economist or research analyst and that he’s a Clinton supporter.
Then we get a long detailed post on his credentials … that clearly shows
… he is not an economist or research analyst
… with absolutely no attempt to refute his support for Clinton.
Yup posting lots and lots of totally irrelevant information sure convinces me he’s fully and completely qualified to comment on something he has no qualifications to comment on.
Maybe that was intended to be funny? Otherwise - just sad.
To Somegirl @8: Assuming your questions were asked seriously and in good faith, I’ll try to answer them best I can.
“just curious - why does obama get kudos for his “mature adult” behavior changing his view on the gas tax but clinton gets endlessly derided for her position on iraq?”
This seems pretty apples to oranges. Obama took the right position against the gas tax pander, possibly as a result of learning from past experience. Good for him. Clinton took the wrong position on the Iraq authorization and has refused to admit it was a mistake, or that anyone could have responsibly assumed Bush would fuck stuff up with the power he was granted. Then she went and voted for Kyle-Lieberman
and edwards gets a pass on that but not clinton?
Edwards wrote a NYT op-ed a long time ago calling the vote a mistake and making peace with the anti-war movement. Clinton has not, and has been battling the anti-war left as hard as (maybe harder than?) she has the pro-war right.
and obama’s not the only one proposing windfall taxes on the oil companies
Correct. They both are. But Clinton proposed offsetting that tax on the Oil companies with a giveaway to the oil companies. As Krugman put it, “pointless, not evil” except that the odds of President Bush signing a windfall profits tax into law are slim and none.
This information is all readily available in the public domain.
what’s the point of this post? if obama supported a gas tax holiday in 2000, then all that means is that he was wrong in 2000.
that doesn’t change the fact that on the tax holiday issue in 2008 obama is right and clinton is wrong. being wrong on a similar issue in the past doesn’t mean you are wrong on that same issue for all time, especially when you change your position to the right one.
Yeah, sure…
Don’t trust the economists, Susie, trust the candidate who’s been caught lying so many times it isn’t even funny. The man who wrote the article isn’t any more qualified to evaluate economic policy than any other member of the public.
What’s most disturbing about this is how otherwise intelligent people are taken in by a charlatan like Hillary Clinton. If the Democrats choose her, I’m going for Ralph Nader or the Libertarians. Even McCain would be better. At least he’s morally qualified for the office.
I know I’m jumping in late here, but…
Why don’t you people stop arguing about the economics and work out the math for yourselves? How much money will you personally save from a 5% reduction in gas prices?
I crunched some numbers yesterday and here’s what I found: I’m planning a trip to Niagara Falls with my girlfriend this summer, and the gas tax holiday would save us less than $15 on the trip.
If your commute is far enough that you fill up your car once a week, you will save about $35 in three months. Not $35 per month, $35 total.
Does this chump change really sound like it’s worth costing the Feds $10 billion in revenue? I say it’s not worth it; you may disagree, but at least work it out for yourself.
Mike at 15: you’re still living in the reality-based community. Have a few shots, you’ll be able to believe all sorts of nonsense.
Why aren’t we taking a look at the profits margins of the big oil companies and the gouging by the individual gas stations! Were I live to where I work is nearly a 21 cent difference? Why?