Hell must have frozen over because I find myself in the implausible position of writing in defense of the Daily editorial board — almost. I’m referring to the June 26 editorial in support of the gas tax and Tim Lee’s June 28 letter to the editor that opposed the Daily’s position.
Tim invokes a little bit of economic theory to make his case — which is more than the Daily editorial board could muster — but sometimes a little is not enough. A more detailed analysis can lead to a different conclusion. In a reasonably competitive market, a cut in the gas tax should cause an increase in gas supplied to the market.
Assuming no shift in the demand function, the eventual result should be a new market equilibrium with a higher quantity of gas being supplied to the market at a lower price. How much more gas at how much of a lower price? That depends. On what? The price elasticity of the supply and demand functions. For example, if the supply function is fairly price inelastic, the new gas price will tend to be near the old gas price, and the oil companies will enjoy most of the windfall of the elimination of the gas tax.
Conversely, if the demand function is fairly inelastic, the consumer will enjoy most of the benefit of the tax cut. In the case of the market for gasoline, demand is probably fairly inelastic in the short run. After all, people don’t curtail their gas consumption significantly when gas prices rise — most still have to commute to work every day.
However, supply is also probably quite price inelastic. Gas suppliers have been maintaining fairly low inventories recently, and this is particularly true in the Midwest. The ability of gas suppliers to increase the gas supply in response to a tax cut or even an increase in price might be severely limited.
Bottom line: Both gas consumers and suppliers would share in the benefit of a gas tax cut, but it is quite possible, if not likely, that gas companies would get the lion’s share of this benefit.
All of that aside, there are good reasons for a gas tax and for not lifting it at the first sign of a “crisis.” I know that as a Libertarian, Tim doesn’t like most taxes, but as taxes go, the gas tax isn’t all that bad. First, it’s a consumption tax. If you don’t use gas, you don’t pay it. This is far better than the income or capital-gains taxes where the government taxes people for working and investing — arguably, two socially worthwhile activities.
Second, since gas-tax revenue is typically earmarked for transportation and road improvements, the gas tax funds government activities that primarily benefit those who pay the tax — people who drive a lot. Third, the internal combustion engine is a primary source of environmental pollution. Since those who enjoy the benefits of consuming gas do not shoulder the full burden of its consequences (i.e. environmental pollution), we have market failure. One way of addressing market failure is to bring the financial cost of consumption more in line with its social cost through the use of a tax.
Finally, politicians ought not to be changing tax policies to respond to short-term price fluctuations. If a gas tax is a good idea, it should be a good idea whether gas costs $1 per gallon or $2. Attempts to temporarily repeal the gas tax are more akin to pandering than good economic policy.
So, while the Daily editorial board’s argument for maintaining the gas tax to support “the vast array of worthwhile government projects and current programs in need of money” is, at best, laughable, its conclusion is correct. The gas tax should stay, or at least not be lifted solely because of the current perceived gas “crisis.”
Paul Enever is a graduate student in chemical engineering. He welcomes comments at [email protected]. Send letters to the editor to [email protected].
