Wednesday, May 10, 2006

Another brain freeze on the gas tax? 

The state legislature is getting into the act now, with Rep Paul Kohls, R-Victoria, proposing a six-month suspension of the 20-cent state gas tax. Let us review our principles of economics, since apparently last week's post didn't reach Rep. Kohls.
  1. The burden of a tax on any good is shared between the buyer and the seller. So removing a tax does not pass all of the price to the buyer. It's shared between them. Economic literacy would require you to distinguish between the legal burden -- who is responsible for sending the check to government -- and the economic incidence of a selective excise tax.
  2. The share given to buyers and sellers depends on the responsiveness of buyers and sellers to changes in price. Whichever side bears the legal burden will shift the tax to the others by their behavior -- people respond to incentives.
  3. Cutting the gas tax temporarily does the opposite of what you'd want. What you want at this time is for prices to signal the relative scarcity of gasoline. The excise tax gets in the way of that to some extent, but has for years. To remove it now though, to counteract the natural activity of markets, is perverse.
Additional tutorial reading here.

Now, in reading about this I went to the econometric evidence, and you find something interesting here. (Unless you really like numbers, duct-tape your head before clicking.) I'm amazed how little research is out there on this specific point. The results of the linked paper are that more of the state tax is passed through to consumers than the federal. Remember, my argument on the federal was that much of it is passed through to consumers. But what little evidence there is suggests the pass-through is half. So lowering or temporarily suspending the gas tax would probably only reduce the gas price by half (Mark Kennedy's suspension at best would reduce the price of gas by nine cents a gallon; the profits of the wholesalers would rise by about ten. That's the sort of thing that gets press coverage and DFLers running to mics about gouging.) But, and this is interesting, nearly all of a state excise tax is borne by the consumer. Holding all other things equal -- especially the taxes charged in other states -- it is fairly easy to shift gas distribution between the states, so supply elasticities for states are higher.

So in some sense it makes MORE sense to cut STATE taxes on gas than federal, if the goal is to get a price cut at the pumps. I still object to temporary cuts on efficiency grounds, as I don't like governments interfering with the price system. But at least this tax proposal, unlike Kennedy's, would have some bang for the buck.