The Gas-Tax Holiday

The Gas-Tax Holiday

The gas tax holiday is a proposal to suspend the federal excise tax on gasoline, starting on Memorial Day, ending on Labor Day. What are the benefits and costs of this proposal? A temporary suspension of the gas tax could bring consumers some price relief, depending on the elasticities of supply and demand. Proponents argue that this would reduce the price of gas at the pump by about 18.4 cents a gallon for regular unleaded gasoline and 24.4 cents a gallon for diesel. If so, it is estimated that the gas tax holiday would save consumers roughly a total of $30 over the three month period. That is money, which these consumers could spend for other consumption goods or keep in savings. On the other hand, it will cost the U.S. Treasury nearly $9 billion in lost revenue, during this time period. If no other source of revenue will be found, these could probably eliminate 300,000 construction jobs, according to the Department of Transportation. But finally the most important argument of the opponents is that the price for consumers will rise until the quantity demanded falls to match the quantity supplied. The gas tax plan would be a giveaway of money to oil companies, instead as a gift to consumers.

To find out, which of the above mentioned scenarios are the most likely; our economic analysis of the proposal must answer the two following questions. What effect does the gasoline tax have on the price and what is the incidence of the tax. The incidence of tax shows us, how much gas tax is paid by consumers and how much is paid by the producers. To answer those questions, we must think about supply and demand curves. It's generally accepted that consumers do not change their use of gasoline over the short term despite large swings in price. That's why the near-doubling of the price of oil over the past year has resulted in only a tiny decrease in U.S. consumption of oil. Also, large swings in price do not change the production of gasoline. That is because it takes some time to exploit new oil fields, build transportation systems to move the oil to the market and build refineries to process the oil into gasoline. Therefore we can say that both, oil supply and demand are inelastic. That means, they show only a minimal short-term response to changes in price and both the supply and demand curves are very steep. Next step is to find out, what effect the gasoline tax has on these inelastic supply and demand curves. The consequence of taxation is that one of the curves shift, which depends on whether the tax is levied on sellers or buyers. In the U.S., the gas tax is levied on the buyers, as result the demand curve shifts downward by the size of the tax. During the temporary suspension of the gas tax, the demand curve would shift back. An additional proposal is to levy the tax on sellers, during the gas tax holiday. If that happens, the supply curve will shift upwards by the amount of