Are Gas Tax Holidays Good Economic Policy?

July 10, 2006

Our answer is a resounding “no,” as detailed in a new analysis released this morning.

With gas prices on the rise, temporary gas tax holidays offer lawmakers a way to give the appearance of “doing something” about gas prices. However, temporary tax changes are almost always a poor way to provide tax relief, compared with more permanent and broad-based tax reductions. From the piece:

While gas tax holidays are popular with lawmakers, they are generally poor economic policy. Tax holidays appear to provide a simple way to offer tax relief to consumers during times of high prices at the pump. However, not all forms of tax relief are created equal.

Some types of tax relief—including gas tax holidays—introduce costly economic distortions into the economy in the process of lowering tax burdens because they favor some industries and products over others. In contrast, broadly based and permanent tax relief does not favor particular industries or buying behavior, providing tax relief without harming the overall efficiency of the economy.1 There is a growing body of research that suggests tax holidays are a costly and inefficient way to offer tax relief to consumers compared with more broadly based and permanent types of tax relief.

As economist John Hood remarked in a different context, temporary gas tax holidays aren’t primarily designed to cut tax burdens. They’re designed to create announcements of tax cuts.

Clearly, that benefits lawmakers who are under pressure from a public upset over prices at the pump. However, from a policy standpoint it is a poor response compared with the many other types of tax relief that are available.

Click here to read the full piece.

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