Rebate Checks or Gas Tax Holiday?

April 27, 2006

As gas prices remain close to $3 per gallon on average, members of Congress are rushing to to put forth various proposals that they claim will help consumers with their ‘pain at the pump.’ One proposal comes from New Jersey Democrat Bob Menendez to temporarily (for 60 days) cut the federal excise tax on gasoline. Another comes from a few Senate Republicans who just want to send every American taxpayer a $100 check in order to theoretically compensate consumers for their gasoline expenses. Highlights of both proposals courtesy of MSNBC.

Senate Republicans advocate sending $100 rebate checks to millions of taxpayers, and a Democrat is leading the campaign for a 60-day gasoline tax holiday.

Either way, it seems no one in Congress wants to be without a plan, however symbolic, to attack the election-year spike in gasoline prices.

A vote is possible as early as this week on the Senate GOP approach, which calls for $100 rebate checks for taxpayers to cushion the impact of higher gasoline prices. The measure seems unlikely to prevail, at least initially, since it includes a highly controversial proposal to open a portion of Alaska’s Arctic National Wildlife Refuge to oil drilling.

Senate Republicans also favor extending a tax break that manufacturers receive for each hybrid vehicle they make, and want President Bush to suspend deliveries to the nation’s strategic petroleum reserve for six months.

Democrats seemed caught off guard by the GOP maneuvering, but a spokesman said they would have a plan of their own.

Sen. Bob Menendez, D-N.J., has proposed a 60-day suspension in the federal tax on gasoline and diesel, a holiday that he says would cut the cost of gasoline by more than 18 cents a gallon and reduce the price of diesel fuel by more than 24 cents a gallon. (Full Story)

Pluses and Minuses for Each Plan

Gas Tax Holiday (Democrat Menendez Proposal)

Plus: Would theoretically target the benefit to exactly those who are purchasing the gasoline; could possibly lower prices at the pump, but drop in prices would be greater as time horizon expands and supply is more elastic.

Minus: Revenue loss; could discourage conservation, yet it would not lower the price of gasoline by the full amount of the tax because producers most likely do bear some of the tax burden, and because of this, it would create a shortage most likely if accompanied by a provision that would require the retail price to fall by the full amount of the tax.

Rebate Check (Senate Republicans Proposal)

Plus: Would not direct that money to go to gasoline purchases, meaning you would get the income effect only in terms of gasoline purchases, not the change in relative prices (substitution effect) that mostly occurs in the Gas Tax Holiday proposal. In other words, it would allow for rising gas prices to continue to encourage conservation.

Minus: Revenue loss; compliance and administration costs of sending out millions of checks; may not expand real purchasing power if prices across the economy merely adjust via an increase in prices.


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