The wrong signal

Suspending US state and federal excise taxes so that consumers can fill their gasoline tanks more cheaply is very bad idea.

Suspending US state and federal excise taxes so that consumers can fill their gasoline tanks more cheaply is very bad idea.

Lawrence Goldstein, president of the Petroleum Industry Research Foundation Inc., New York City, said that. although tax holidays are well-intentioned, they would provide neither significant retail price relief nor product supply relief.

In Congress, four senators filed a bill to suspend the 18.4¢/gal federal gasoline tax for 150 days. The principal sponsor, Kay Bailey Hutchison (R-Tex.), said the $1.5-1.8 billion/month lost by the Highway Trust Fund would be "made whole" from the federal budget surplus (see related story, p. 22).

Last week, Illinois suspended its 5% gasoline sales tax for 6 months. Earlier, Indiana suspended its 5% tax for 60 days.

Separately, Sen. Frank Murkowski (R-Alas.) filed a bill to give consumers a tax deduction for federal, state, and local gasoline taxes paid in second half 2000.

Bad idea

Goldstein argued governments should not cut taxes when supplies are very tight, because it will spur higher demand.

"The one thing we don't want to do in the short term is stimulate demand. Industry just doesn't have capacity to meet increased demand. Refiners are maxed out, and imports are below year-ago levels. Supply cannot be responsive to higher prices in the short term, so demand must be reduced."

Also, Goldstein said the current high-price environment provides a strong incentive for industry to overcome the existing supply bottlenecks.

He said a federal gasoline tax holiday would send conflicting signals to other nations. "The US has among the lowest gasoline taxes in the world, and cutting them further reduces our credibility in international negotiations on energy and environmental matters."

Goldstein also said a broad tax also is too heavy-handed. "It is not targeted to the consumers who need relief the most: low-income individuals."

He said a much better approach would be to give those persons an income tax credit for gasoline taxes paid.

Passthrough problem

And finally, Goldstein said a tax suspension would be a mine field for the oil industry.

"Over the long-run, lower taxes would be expected to passed through to the end-use consumer. However, in the short run, given the tight balances that currently exist, consumers are less likely to see these benefits.

"No company can say with any certainty, `We're going to pass this tax savings all the way through to consumers.' The market would prevent them from doing it, because as soon as they did, in an unbalanced market, price would suddenly surge, and they'd have to go out and find extra supply. And they'd be chasing the price up."

Goldstein said consumers will be outraged if pump prices don't fall by the same amount that taxes are reduced.

"The industry is going to be at each other's throats. The gasoline dealers will yell at the wholesalers, the wholesalers will yell at refiners, and the Congress will yell at everybody.

"Oil companies will be battling for years about whether the tax was passed through or not and who benefited or not."

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