A Primer on the Gas Tax Holiday
If a gas tax holiday drives the price down by the full amount of the tax (18.4 cents), the average driver would save about $28 ($27.67) between June 1 and September 1. But we think the price would fall by only a small fraction of the 18.4 cents tax – so instead of $28, the average driver might save $5 to $10.
Here’s how we get the $28 figure:
Average annual per vehicle gas use (from AAA) = 550 gallons
Percent of annual miles drive in June, July, and August = 27.4. Calculated from data in 2001 National Household Travel Survey.
Multiply 550 x .274 = 150.6 gallons consumed in summer months.
At 18.4 cents per gallon, this comes out to $27.71
Other Relevant Information
The average price of regular unleaded gasoline increased from $1.85 in 2004 to a projected $3.54 in the summer of 2008. This price increase will cost the average consumer about $260 in the summer of 2008 (assuming no reduction in gasoline consumption), compared to what he would have paid at 2004 prices.
The tax rate has remained constant since 1993 at 18.4 cents per gallon. This means the tax as a share of the price has dropped from 9.9 percent to 5.2 percent. In comparison, average gasoline prices increased by 13.6 percent (41.5 cents) between January and April. So even if the price falls by the full amount of the tax, it would wipe out only about 44 percent of the price increase in the last three months.
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I don't think that the 28$ will ever be reached. The ones who are in the fuel business will only see this as a way to make more profit. If the tax drops by 14 cents, the prices will only drop as much as 7 cents. The rest will be extra profit for the vendors. The end result is that it will not show up as extra money in the consumer's pocket.
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Thank you for your comment.
I don't think it follows that there would be no price response to a tax increase. It may well be true that it would be much easier for refiners and wholesalers to withhold gasoline, especially in response to a temporary tax increase, than to increase the quantity supplied.
You are, of course, right that the tax, nominally paid by suppliers, would have no effect on the demand for gasoline, although a higher price would reduce the quantity demanded. It's easy to muddle this point in trying to explain market responses to lay people. My only slightly weak defense is that people who understand the convention that demand refers to the relationship between quantity demanded and price paid by consumers probably do not need us to explain the market dynamics. It would suffice to explain that supply is nearly perfectly inelastic with respect to price increases in the short run (and demand isn't).
The supply/demand model and its application to tax incidence theory is a staple in introductory economics textbooks. In asking about the effect of a reduction in an excise tax on my intro micro exams, one unacceptable answer runs something along these lines: “While the tax decrease may initially lower price, the increase in demand resulting from a lower price will cause prices to increase back to where they started.” This is a classic example of confusing “changes in demand” with “changes in quantity demanded”. I am surprised and dismayed to see precisely this argument repeated by several prominent commentators in the recent debate over the gas tax holiday. The most persuasive argument that I have seen that a tax holiday will not affect the price of gasoline is that the short-run supply is essentially perfectly price inelastic. Analyst who ascribe to this view should in fact be advocating an increase in the gas tax, which should have no effect on price and would cut into the profits of oil companies, in addition to increasing revenues to the highway trust fund. However, I suspect that no commentator would seriously support this policy, even as they argue no price effect from a tax decrease.
Your analysis of the saving to the average consumer is reasonable, but it should be noted that it refers to the average consumer of gasoline. The saving would be higher to the above-average consumer, such as rural residents, and probably explains why they find the proposal more appealing. I note this because your analysis has apparently been highly persuasive — I have seen your figure cited numerous times.