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The Gas-Tax Hustle

May 5, 2006

Congress toyed with the idea of a tax holiday on gasoline as a way to drive the price down to address constituent complaints. But, as you might guess, they rejected it.

Why, oh why, did Congress decline to give us a bit more liberty, aside from the obvious fact that they like the revenue and power? Well, we can't go too much aside after all: they like the revenue and power. From their point of view, why give it up?

Here is the New York Times's explanation: "it was rejected as unworkable, partly because there were no guarantees that the oil companies would pass the saving onto consumers, partly because the tax pays for federal highway projects, and partly because many Republicans say the only answer to the problem of high gas prices is to increase supply."

It's true that taxes are not passed on to the consumer directly. According to the American Petroleum Institute, gas taxes average 41 cents per gallon of gas (they doubled in the 80s and increased 54% since 1990). Here is a complete map .

That doesn't mean that gas prices are thereby increased by that exact amount (see Brandly on this).

Prices float freely, and, as much as gas stations might like to pass on the costs of taxation to the consumers, they have to price by supply and demand like everyone else. These taxes, like all taxes, ultimately fall on producers of goods, with consumers paying only down the line.

In the same way, a reduction in the tax will not directly cause prices to fall. But by reducing the costs of doing business at the retail level, stations can acquire more gasoline, boosting supply and thereby causing prices to fall. But this result presumes that traders will bid down prices in expectation that the tax holiday will last more than a week or month.

Thus do we see that the distinction between reducing the consumer price and increasing supply is really phony. They are two sides of the same coin. Reducing the tax at the pump will ultimately increase the amount of gas produced and made available on the market. Again, all taxes, even consumption taxes, are ultimately production taxes.

But let's say that the price of gas actually fell in one day by 18 cents (federal level) or a total of 41 cents (if states went along). Can you imagine? Consumers would flip out. It would be a real consciousness-raising moment. "You mean to tell me that every time I fill up my tank of gas, I'm forking over more than $8 to government? Hey, guys, what kind of racket do you have going on here?"

Then there would come a time for the holiday to end. What then? That might really inspire a revolt. Instead of being angry at gas stations, consumers would turn their vengeance on the party that truly deserves the blame. The real gougers would show their face, and they are likely to be pummeled with rotten fruit.

You know the rap on so-called predatory pricing? The idea is that a private business drives prices down low to push the competition out, and then raises them again once it has the monopoly. It doesn't work in real life because the losses are hard to sustain and the moment you raise prices, you invite the competition back in.

Well, predatory taxation works the same way. If you eliminate the tax, and consumers start to see the difference, it can be very difficult to boost those taxes once again. The politicians might find themselves in a position of having to keep the tax low in perpetuity.

This is why government has a principle: never ever, under any circumstances, abolish a tax unless your life depends on it. You might find that you can never get it back again.

Thus do we see the true origin of the ridiculous idea that Washington ought to send every American household $100 to compensate for high gas prices. The idea was that people will continue to look at gas stations as the enemy and the government as the benefactor. Americans may be stupid but not that stupid: the idea was shot down immediately.

Still, the idea of a tax holiday was an excellent one, the best idea to come out of Washington in years. We should return to it, and force the issue. Not only should there be a holiday for this one tax but all taxes. Maybe we need a holiday from government itself.

Give us a month or two without looting, badgering, warmongering, regulating, pestering, and finger wagging – just as an experiment in the interest of scientific public policy.


Lew Rockwell is president of the Mises Institute and editor of LewRockwell.com. Rockwell@mises.org. See his Lew's Columns on Mises.org. Comment on the blog.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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