Wednesday, May 07, 2008

America, Where Every Day is a Tax Holiday

In my latest FindLaw column, I explain why the proposed gas tax holiday is such an idiotic idea. The point has been made in other places, but I thought it worth a short sustained argument that actually addressed the feeble arguments that could be made in its favor. I then turn to the question of whether the attraction of such measures for politicians undermines democracy. Because the column went to bed before yesterday's primaries, I don't address the impact this issue had on Indiana and North Carolina voters.

Here I want to raise yet one more argument against the gas tax holiday, one that I did not make in the column. You can bet your bottom dollar that if Congress is foolish enough to enact the gas tax holiday (or if one of the state legislatures contemplating a similar measure at the state level does so for state fuel taxes), then when the expiration of the holiday approaches, someone will make the argument that the McCain campaign now makes about the Bush tax cuts: Permitting the officially temporary tax break to expire is, from the perspective of the taxpayers, a tax hike, and so the gas tax holiday should be made permanent.

It's tempting to think there's nothing at all to this argument. Branding one's political opponents as tax hikers is partly just a GOP marketing strategy, like calling the estate tax the "death tax." But it's also true that people paying zero federal gas tax on Sept 1 and 18.4 cents per gallon on Sept 2 does experience a tax increase. The problem is assuming that's the end of the argument. In general, the law sensibly protects people's reasonable reliance and nobody can reasonably rely on not paying a tax that he is scheduled to pay, simply because he hopes that the legislature will enact a new law relieving him of that duty.

Unless, that is, anti-tax legislators repeatedly state their intentions of making permanent nominally temporary tax cuts. Then a reasonable citizen could be led to think that the tax is going to be permanently repealed and it would be reasonable for such citizen to experience the expiration of the tax cut as a tax increase. Of course, I would still say: So what? People experience disutility from tax increases, but if the utility of the revenue (and any Pigovian effect of the tax in the case of a tax on harmful activity such as driving) outweighs that disutility, the tax should not be permanently eliminated.

Bottom Line: 1) There is something to the point that people (with high incomes) will experience the non-enactment of legislation making the Bush tax cuts permanent as a tax increase; but 2) that's mostly because Republicans have been deliberately inducing expectations that the tax cuts will be made permanent; 3) in any event, changes in the tax law routinely upset expectations but that's not by itself enough to oppose all changes (or non-changes) that leave people paying more in taxes than they expected; and 4) lawmakers who oppose a tax cut as unsound long-term policy should be very wary of voting for it as a "temporary" measure, given that other lawmakers will then try to make it permanent.

Posted by Mike Dorf


Tam Ho said...

I would further argue that not all reasonable expectations (and accompanying reliance) about the future state of laws are the same.

In one category falls expectations such as the one that laws will continue to require driving on the right - rather than the left - side of the road.

Another category contains expectations such as those based on promises and statements of intentions by legislators.

Even without articulating an abstract set of necessary and sufficient criteria that distinguish the two categories (even if such an exercise would be useful), it's clear that they should not be accorded the same level of deference.

egarber said...

As a slight aside here, there's a funny irony in the debate about the gas tax holiday. If we're to buy the narrative about Obama, he's simply too inexperienced to be an effective president; however, he nailed this issue precisely because he HAS direct experience on the matter. See this from last week's Meet the Press (sorry for the length). The other nice thing Barack does is admit a mistake (God forbid a politician ever do that).

MR. RUSSERT: One issue that has really defined the two campaigns here in Indiana is this debate over gasoline...

SEN. OBAMA: Right.

MR. RUSSERT: ...the price of it and whether there should be a tax holiday...

SEN. OBAMA: Right.

MR. RUSSERT: ...from the federal taxes. This is Hillary Clinton's ad talking about you. Let's watch.

(Videotape of political ad)

Narrator: Now gas prices are skyrocketing, and she's ready to act again. Hillary's plan, use the windfall profits of the oil companies to pay to suspend the gas tax this summer. Barack Obama says no, again.

People are hurting, it's time for a president who's ready to take action now.

(End videotape)

MR. RUSSERT: Why are you against giving taxpayers in Indiana, North Carolina, a relief from federal gasoline tax this summer?

SEN. OBAMA: You're right, Tim, this defines, I think, the difference between myself and Senator Clinton. This gas tax, which was first proposed by John McCain and then quickly adopted by Senator Clinton, is a classic Washington gimmick. It, it is a political response to a serious problem that we have neglected for decades. Now, here's, here's the upshot. You're looking at suspending a gas tax for three months. The average driver would save 30 cents per day for a grand total of $28. That's assuming that the oil companies don't step in and raise prices by the same amount that the tax has been reduced. And, by the way, I have some experience on this because in Illinois we tried this when I was in the state legislature, and that's exactly what happened. The oil companies, the retailers were the ones who ended up benefiting.

MR. RUSSERT: You voted for it, too.

SEN. OBAMA: I did. Exactly. And that...

MR. RUSSERT: When gas was only $2 a gallon.

SEN. OBAMA: And, and that's my point. I voted for it, and then six months later we took a look, and consumers had not benefited at all, but we had lost revenue.

MR. RUSSERT: So you learned from a wrong vote.

SEN. OBAMA: Yeah, I learned from a mistake.
And, in addition, what happens is, is that this would come out of the Federal Highway Fund that we use to rebuild our roads and our bridges. And if we don't have that fund, then we're looking at thousands of jobs being lost in Indiana and in North Carolina.

Now, Senator Clinton says that she's going to use the windfall profits tax to fill it. First of all, she's already said that she's going to use the windfall profits tax for something else, as I have, and, and that is to invest in clean energy and, and other important measures. So that money, she's already spending twice. More importantly, nobody thinks that George Bush is actually going to spend--or is actually going to sign a law for windfall profits taxes, so that's not going to happen this summer.

So what this is, is a strategy to get through the next election. And Senator Clinton's own staff told The Washington Post, "We don't think this is really going to go anywhere. We don't think it's going to work, but we think it's a good issue to use in a campaign." And that's what Washington does. We, we, we don't deal with the serious issues that are in front of us, we try to figure out what's going to poll well and what can we do to get through the next election.

egarber said...

In your Findlaw article you mention that supporters of the holiday can cite price elasticity to argue that demand won't increase.

But even if you grant the argument, it defeats itself -- because if demand won't change due to price, that offers suppliers the opportunity to raise prices to previous levels with no harm. In other words, if demand is static, then there's no risk in oil / gas companies simply absorbing the cushion (the tax reduction) for themselves.

egarber said...

Oops. I meant price INelasticity.

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