Thursday, April 27, 2006

Playing political football with gas prices

Posted by Craig Westover | 4:18 PM |  

This today from the Kennedy camp on Amy Klobuchar's proposal to raise gas taxes.

Amy Klobuchar’s Solution to Gas Prices is. . .
A Gas Tax

(St. Paul, Minnesota) – Senate candidate Amy Klobuchar has followed the advice of Chuck Schumer, head of the Democrat Senatorial Campaign Committee, by staging political events at gas stations to blame Republicans for the high prices at the pump. However, Amy Klobuchar’s own words speak much more clearly than her scripted, Washington, DC stunts.

Amy Klobuchar has offered no solutions to help with costs at the pump. She has not commented on Mark Kennedy’s plan to temporarily suspend the national gas tax, in fact in a recent interview she wouldn’t even rule out raising the gas tax!

During an interview on MPR, Klobuchar was asked, “So you’re not going to say a yes or no on a gas tax right now?” Klobuchar replied, “No.” (MPR Interview, February, 23, 2006)

“With record prices at the pump, Minnesotans should not be facing a potential gas tax increase,” said Heidi Frederickson, Press Secretary for Mark Kennedy 06. “In fact, with the summer driving months approaching we need to reduce the burden on Minnesota drivers and temporarily suspend the national gas tax. Mark Kennedy has a plan to lower gas prices. Amy Klobuchar offers only Washington political stunts and refuses to rule out a gas tax increase.”

Yes, Amy Koluchar’s solution of raising the gas tax is pretty darn dumb. Unfortunately, so is Mark Kennedy’s idea of temporarily suspending the gas tax. Popular, yes. Short term it would help the Fishsticks family budget, but it’s every bit as economically foolish as Klobuchar’s plan

Let’s analyze what a temporary suspension of the gas tax would do.

First, unlike income tax cuts or capitals gains tax cuts, which are taxes on productivity, the gas tax is, in theory, a necessary tax tied to specific product consumption associated with transportation. So suspending the tax does deplete government revenue, which has to made up somehow. Unlike reducing a tax on productivity, which puts more money into the economy, reducing a consumption tax on a necessary commodity like gasoline means we are likely to drive more, rather than consume less and save the difference. For 30-days, we are not going to change driving habits that haven't changed in year of incresing prices. Suspending the gas tax (lowering the commodity price) will increase demand at a time when too much demand is the problem causing high prices in the first place.

Now lets look on the price and supply sides. The price of gas suddenly drops 18 cents a gallon. Demand goes up and, duh, so do prices. Perhaps not 18 cents a gallon, but they will rise. If they don’t, stations are going to start running out of gas because the supply pipeline is stocked for the higher price/lower demand level. It’s ironic that someone on the bandwagon of investigating oil company profits is making a proposal that will effectively increase oil company profits.

But won’t the oil companies increase supply to meet the new, higher demand? No, because the demand is temporary.” In 30-days the price goes back up 18 cents a gallon and the demand will soften. So why would an oil company ramp up supply when they can maximize profit at a higher price on lower volume, knowing that the high demand situation is only temporary? Given that the price of gas must go up in the interim to meet the higher level of demand caused by suspending the gas tax (or else we’re going to see spot shortages), the price after the tax is reinstated is likely going to be higher than it was before the gas tax was suspended.

Oh those evil oil companies!

Now if Kennedy wants to talk about permanently eliminating the federal gas tax, which since the feds turned over the interstate highway system to the states, it doesn’t spend on transportation anyway, now that’s a different story. That introduces a permanent change in the price at the pump that both consumers and oil companies can plan around. That makes some sense.

Frankly, watching Kennedy and Klobuchar trying to handle the gas price political football is more fun than watching a couple of monkeys try to mate with a football -- until you realize who is really being kicked around.

Update: Name that candidate (bonus points for identifying the party) --
"XXXXX has already voted to make gas price gouging a federal offense and has been a national leader advocating tax incentives for the producers of hydrogen, hybrid and ethanol technologies."
Update: King Banaian adds his usual insight. King is right -- where I refer to "demand" above, it is correct to say "quantity-demanded." A temporary change in price doesn't change the demand "at any price," but only the "the quntity demanded" given the reduced price. It's econ-talk, but King is correct. It doesn't change the analysis. King adds a lot more.