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 Then a reasonable citizen could be led to think that the tax is going to be permanently repealed and it would be reasonable for such citizen to experience the expiration of the tax cut as a tax increase.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