July 20, 2006

Gas Tax Holidays No Cause for Celebration

(A version of this article originally appeared in the July 19, 2006 edition of the Greeley Tribune.)

With the summer driving season under way and gas prices topping $3 a gallon, lawmakers everywhere are scrambling to give drivers a much-needed break at the pump.

Gas taxes, which average almost 50 cents a gallon, are getting attention as motorists feel the squeeze on their pocketbooks. Unfortunately many lawmakers are responding by offering only temporary relief in the form of “gas tax holidays.”

“Holidays” sound great—who couldn’t use a break from taxes? But unfortunately, they’re not all they’re cracked up to be.

Lawmakers pitch tax holidays as the best thing since Fourth of July fireworks. But in reality they’re more like an April Fool’s joke—scoring political points for lawmakers eager to announce tax cuts, without giving meaningful, broad-based tax relief to consumers.

True, tax holidays are tax cuts, but not all tax cuts are created equal. Compared with permanent, broad-based tax relief, gas tax holidays are among the worst ways to give taxpayers a break.

Gas tax holidays are aimed at lowering prices at the pump. But they don’t do this as effectively as many lawmakers believe. In almost all cases, a temporary 25-cent gas-tax holiday won’t result in motorists saving a full quarter.

The reason is simple: The burden of gas taxes falls partly on motorists, and partly on gas station owners. So when taxes are cut, the relief gets split between the two. Station owners keep part of the tax holiday savings, and pass on only what’s left as lower prices—making holidays a less effective way to cut gas prices than is widely believed.

The only way a gas tax holiday will cut prices by the full amount of the holiday is by forcing down prices with old-fashioned price controls. And anybody old enough to remember the gas lines and shortages of the 1970s knows how well that’s likely to work.

But even if tax holidays were a good way to cut prices, they’d still be bad tax policy.

First, they risk turning station owners into petty criminals just for setting the wrong price. Consider Georgia’s gas tax holiday, passed in the wake of Hurricane Katrina in 2005. It tried to crank down gas prices by forcing stations to “pass on” the full value of the holiday. Failure to set the right price—as determined by politics, not good economics—constituted an “unfair or deceptive act or practice” punishable under Georgia’s “Fair Business Practices Act.”

Making tax holidays work often requires costly enforcement bureaucracies and legal threats to station owners. Not only is that unfair to mom-and-pop businesses, but it puts an economic drag on their efficiency—certainly not helping any to bring down prices.

An unstable tax code is a lousy tax code. Why? Because it turns long-term business planning into a crap shoot. Imagine business owners trying to decide where and when to invest new dollars in companies, with lawmakers continually tinkering with the tax landscape around them. Tax holidays turn business planning into more of an economic minefield than it already is.

They also increase what economists call the “paperwork burden” of taxes. Tax holidays effectively set up two parallel tax codes operating in different time periods, each with labyrinthine rules, regulations and enforcement bureaucracies. This results in wasted time and effort spent filling out forms, learning rules and jumping through legal hoops. Instead of giving a real tax break, holidays risk turning small business owners into tax bureaucrats.

But the real problem with tax holidays is that they let elected officials off the hook too easily. Holidays distract attention from types of tax relief that are politically more difficult to enact but far more beneficial to taxpayers and the economy.

If consumers are hurting, why help them for just one month? Why not give a break on everything with an across-the-board sales-tax cut? Or better yet, why not trim wasteful pork spending from transportation budgets—which are often funded by gas taxes—and pass on the savings as permanent tax relief?

Gas tax holidays make a great sound byte for lawmakers, but they’re lousy tax policy. They’re one of the rare tax breaks we should do without.

Andrew Chamberlain and Jonathan Williams are economists at the Tax Foundation in Washington, D.C.