The ?Do Something Disease?

May 3, 2006

As I mentioned in my recent op-ed in the Los Angeles Times, gas prices are exceeding $3 per gallon and many of our elected officials have a bad case of the “do something disease”. Members of all political stripes feel obligated to provide an instant government solution to these high gasoline prices.

Many Democrats seem to be warming to the idea of temporarily suspending the federal gasoline tax of 18.4 cents per gallon. Speaking on that subject, the White House’s Council of Economic Advisors chairman, Edward Lazear, said:

“One of the things we worry about when we cut the tax on gasoline is that it basically stimulates additional use…Over a longer period of time, it would be a significant problem … because what it would do is it would encourage us to use more oil, not less and that is the way we got to the situation right now,” he explained. “That probably is one of the policies that we would like to avoid.” [Full Story]

To make up the lost revenue from suspending gasoline taxes (while punishing oil companies for their “excessive” profits), many are supporting a new windfall profits tax. Tax Foundation research has shown how the last time we experimented with a windfall profits tax, it stunted domestic projection and failed to raise even a fraction of the revenue forecasted. Even though oil companies are earning record profits, Tax Foundation research also found that oil companies are already paying a “windfall” of taxes to state and local governments

Some Senate Republicans offered a proposal that would issue $100 rebate checks, in an effort to help Americans with rising gas prices. Last night on Fox News Channel’s Special Report with Brit Hume, Senate Minority Leader, Harry Reid criticized the rebate plan:

“The little tiny rebate they were suggesting for two tank fill ups, is basically what it amounts to, is gone because the oil companies need to make more money.”

Nether of these government “solutions” will reduce gasoline prices in the short term, because as Ben Bernanke said, “Unfortunately nothing can be done to effect [sic] oil or gasoline prices in the short term.” However, it is strange that Senator Reid calls the $100 rebate plan too small. Under the gas tax suspension plan, American motorists would have to use over 543 gallons of gasoline in the 60 day period in order to save $100. This is assuming that consumers bear the totality of the incidence for the 18.4 cents per gallon federal tax, which is unrealistic. If you assume the incidence is divided between producers and consumers, motorists would have to consume well over 543 gallons (in 60 days) to save $100.

With gas prices at $3 per gallon, our officials are just trying to satisfy their insatiable desire to “do something” by supporting these proposals. It seems like CNN’s Bill Schneider got it right. Speaking on Lou Dobbs Tonight, he said, “Talking about supply and demand gets you an “A” in economics and an “F” in politics.”

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