Gas Tax and Record Profits

[IchabodPlain]

After hearing McCain's speech on the economy yesterday, I couldn't help but do some thinking. McCain has called for a relaxation of the federal gas tax during the summer months in the US to try to offset the high price spikes that occur during the summer months. I am interested is finding out if this plan would do any good.


As an aside, I was looking into the state and federal gas taxes, I was slightly shocked to see that the federal gas tax is more than what oil companies receive in profits per gallon. So does that mean the government also received record profits last year too?

 

[Random]

Not quite. Most of that goes directly into road repair work. Roads are surprisingly expensive to maintain. My father, who is the one to ask about such arcane matters, once explained to me that a family sedan does about three or four cents of damage to a highway every mile it travels.

The more people drive, the more gas they buy, the more taxes they pay, and the more repairs have to be done on those roads. Gas taxes are surprisingly equitable. Except for tractor trailors which do a lot more damage per mile and are basically being subsidized by small vehicle owners...

 

[Kestrel]

After hearing McCain's speech on the economy yesterday, I couldn't help but do some thinking. McCain has called for a relaxation of the federal gas tax during the summer months in the US to try to offset the high price spikes that occur during the summer months. I am interested is finding out if this plan would do any good.

When supplies of gasoline are constrained, demand has to fall to match the supply. As the price goes up, some motorists respond by driving less, driving smaller cars, carpooling or taking the bus. As the price goes up, more people make those kind of decisions until we reach the point where demand matches the supply. Only then will the price level off.

If the price where this summers supply matches demand is $4.50 a gallon, that will be the price of gas regardless of taxes. Taxes could be cut completely or raised by 50 cents a gallon and the price at the pump would still end up at $4.50 a gallon. McCain's tax holiday would simply divert money currently going to the highway trust fund into oil company profits and executive bonuses.

 

[Cain]

When supplies of gasoline are constrained, demand has to fall to match the supply. As the price goes up, some motorists respond by driving less, driving smaller cars, carpooling or taking the bus. As the price goes up, more people make those kind of decisions until we reach the point where demand matches the supply. Only then will the price level off.

If the price where this summers supply matches demand is $4.50 a gallon, that will be the price of gas regardless of taxes. Taxes could be cut completely or raised by 50 cents a gallon and the price at the pump would still end up at $4.50 a gallon. McCain's tax holiday would simply divert money currently going to the highway trust fund into oil company profits and executive bonuses.

I do not understand this argument. Competition also regulates price. It's not as though THE price of gas is $4.50. It depends.

Let's say my dream comes true, and I move to Mexico to become a gardener. Suppose the neighborhood where I work has a crime boss ominously known as Green Thumb. Homeboy demands I have to pay a tribute on all of the lawns I mow. Praise Zeus, Green Thumb suddenly dies, so I no longer have to pay the tax. Now, does that mean my clients will see an immediate and generous price reduction? No, I'll charge the Martinez family just the same and pocket the difference. However, in the presence of competition it's possible a rival gardener will try to undercut me because all of this extra money that is up for grabs. And since gardening has become more profitable, the occupation will attract more people, pushing the price of my labor down. Now in the real world, even if certain Market Fundamentalists fail to account for pesky facts, there are problems of imperfect competition/barriers to entry. If you're talking about monopoly or collusion, then sure.

People will often say, "well, if a company could get X dollars for their product, then they would just charge X dollars." After all, gas is a relatively inelastic good. People will pay $5 per gallon, so why don't companies just charge that much? Well, part of the so-called "beauty" of capitalism is that greed is checked by greed. One company or business cannot charge that much because someone else will charge less. If you're out in the middle of nowhere then you will charge a premium, but if your profits are sky-high then others might see an opportunity to get in on the bonanza.

We plainly need a gas tax because of all the externalities associated with its consumption (roads, the environment), plus the fact the government already subsidizes oil (not just mollycoddling dictators, but protecting shipping lanes). A neo-con like Charles Krauthammer favors gas taxes in large part because it means less money for the Middle East and more revenue for the government.

 

[IchabodPlain]

I do not understand this argument. Competition also regulates price. It's not as though THE price of gas is $4.50. It depends.

Very true.

People will often say, "well, if a company could get X dollars for their product, then they would just charge X dollars." After all, gas is a relatively inelastic good. People will pay $5 per gallon, so why don't companies just charge that much? Well, part of the so-called "beauty" of capitalism is that greed is checked by greed. One company or business cannot charge that much because someone else will charge less. If you're out in the middle of nowhere then you will charge a premium, but if your profits are sky-high then others might see an opportunity to get in on the bonanza.

We plainly need a gas tax because of all the externalities associated with its consumption (roads, the environment), plus the fact the government already subsidizes oil (not just mollycoddling dictators, but protecting shipping lanes). A neo-con like Charles Krauthammer favors gas taxes in large part because it means less money for the Middle East and more revenue for the government.

Not all of the gas tax pays for Highways, and oil industry profit margins have been at around 8% for the last decade. I agree we need a gas tax, but I think it may be a good proposition to ease the tax for three months during the summer.

The only downside I see is the possible additional spike in demand that it could create, but your first paragraph concisely offers a rebuttal to that argument.

 

[Cain]

The earlier-mentioned Krauthammer (who is loathsome and stupid... and evil) has, in any event, proposed taxing gas at some level. So, I think when he wrote it he said we tax it so that it costs three dollars a gallon, which gives people an incentive to drive less, get a more fuel efficient vehicle, blah blah blah. When the price goes up we implement a proportional tax cut. When the price goes down, the government increases taxes, so that demand is kept down and less money goes to the Middle East. Maybe you could have something like that for a very limited amount of time...

 

[Tailgater]

It depends. Some taxes are per gallon and some taxes are based on sales. Gas is taxed in alot of ways before it ends up in our tank.

And an Illinois state senator has proposed permanently lowering the state's 6.25 percent sales tax on gasoline to 1.25 percent, while keeping a 19-cents-a-gallon fuel tax.

http://www.stateline.org/live/printable/story?contentId=210368

I remember hearing a news report in Indiana a year or more ago that revenues had shot up when prices took the first big jump, but I never followed up on it.

 

[IchabodPlain]

The earlier-mentioned Krauthammer (who is loathsome and stupid... and evil)

..I like some of the op-eds that my St. Petersburg Times runs on Sundays by him...

has, in any event, proposed taxing gas at some level. So, I think when he wrote it he said we tax it so that it costs three dollars a gallon, which gives people an incentive to drive less, get a more fuel efficient vehicle, blah blah blah. When the price goes up we implement a proportional tax cut. When the price goes down, the government increases taxes, so that demand is kept down and less money goes to the Middle East. Maybe you could have something like that for a very limited amount of time...

Gasoline is a relatively inelastic good, is it not? I think even if gas was at $4-7 in the US, demand would essentially remain the same in the absence of or until a large portion of Americans purchasing 40-50mpg vehicles. And essentially those who are hurt most by a higher price are those who have the least, or those who can't afford the new car.

My problem with this I doubt the government can make these kind of regular changes in the tax code to keep up with the market.
I think McCain's plan makes sense because it is simply a cut in the federal gas tax when the natural cycle of demand is at it's highest (in the summer months). It is not meant to regulate demand, but merely use the government to ease the price to consumers when demand is at it's hight.

 

[JEROME DA GNOME]

As an aside, I was looking into the state and federal gas taxes, I was slightly shocked to see that the federal gas tax is more than what oil companies receive in profits per gallon. So does that mean the government also received record profits last year too?

This is a symptom of Fascism.

 

[Rob Lister]

This is a symptom of Fascism.

wow, perhaps you should consider immigration.

 

[JEROME DA GNOME]

wow, perhaps you should consider immigration.

What is the point in presenting other pseudo Fascist States to contrast and compare?

 

[Khonshu]

The other thing to remember is that the construction costs of building and maintaining roads are directly related to the cost of oil. Most taxes dedicated to the road system (e.g. federal & state fuel taxes) are mainly per gallon taxes - in my case, I seem to recall the Fed tax being about 19 cents per gallon, + 7.5 cents per gallon for state tax. This doesn't change when oil is $35 a barrel, or $135 - but the cost of asphalt sure does! Not to mention the cost of all the other heavy materials (like concrete & steel) that have to be manufactured & transported to the construction site.

The cost of right-of-way to build/improve roadways is another issue altogether - but it's still paid for by the same tax.

I work in the transportation industry - keeping cost projections accurate for the last 2-3 years has been practically impossible.

 

[Kestrel]

I do not understand this argument. Competition also regulates price. It's not as though THE price of gas is $4.50. It depends.

When there is a shortage of the product being sold, in the absence of other controls on demand such a rationing, demand is controlled by price. When the demand for gasoline is higher than the supply, gas stations are free to raise prices. The stations that don't run out of "bargain" gas rather quickly.

During the aftermath of Katrina, George dropped the state tax on gasoline. Stations did drop their price at that time. Georgia threatened to prosecute them if they didn't. But gas prices in Georgia rose rather quickly to match that in surrounding states that still had state taxes on gasoline.

The mistake most free market evangelists make is assuming that supplies will rise almost immediately when the price goes up. When supplies are constrained, price will have to go up enough to change driver behavior. It takes a steep price hike to stop Americans from using a gas guzzling monster truck to haul themselves and a sack lunch to work.

 

[Cain]

When there is a shortage of the product being sold, in the absence of other controls on demand such a rationing, demand is controlled by price. When the demand for gasoline is higher than the supply, gas stations are free to raise prices. The stations that don't run out of "bargain" gas rather quickly.

First of all, I think you're conflating demand with quantity demanded. Second, you are still ignoring competition, which directly affects price; not all matters of economics simply boil down to supply and demand. Suppose, for example, there are X number of widgets for sale; as the price goes up quantity demanded falls (obviously), and as price goes down, quantity demanded rises. No controversy there. However, the price will vary depending on if ONE company (or cartel) owns all of the widgets (assume no substitutes) versus 10,0000 companies, each with similar stocks on hand. This is why if I go to Disneyland I can expect to be charged some obscene price for a bottle of water.

During the aftermath of Katrina, George dropped the state tax on gasoline. Stations did drop their price at that time. Georgia threatened to prosecute them if they didn't. But gas prices in Georgia rose rather quickly to match that in surrounding states that still had state taxes on gasoline.

I did some brief Google searching which mentioned some stations having shortages due to the fact they could not get gas because of damage caused by the hurricane.

 

[davefoc]

Has anybody asked McCain what tax he would like to raise to make up for the tax that he proposes to eliminate temporarily?

Or perhaps McCain proposes to cut something to make up for the tax the he proposes to eliminate temporarily?

Surely with a massive annual national deficit and nine trillion dollars or so in total national debt and a war raging that is due to suck another few trillion from the US McCain doesn't propose to just increase the deficit like the fiscally irresponsible moron that he aims to replace does he?

Not quite. Most of that goes directly into road repair work. Roads are surprisingly expensive to maintain. My father, who is the one to ask about such arcane matters, once explained to me that a family sedan does about three or four cents of damage to a highway every mile it travels.

I think your dad might have been wrong. My understanding is that the damage from large trucks completely eclipses road damage from cars. A highway designed to withstand 75,000 pound truck traffic doesn't seem like it would sustain much damage from a 3,000 pound car. Of course trucks have more and larger wheels to distribute the load on the highway but the pressure of the tires on the road from a loaded truck is still much greater than the pressure on the road from a car.

 

[IchabodPlain]

Has anybody asked McCain what tax he would like to raise to make up for the tax that he proposes to eliminate temporarily?

Or perhaps McCain proposes to cut something to make up for the tax the he proposes to eliminate temporarily?

Surely with a massive annual national deficit and nine trillion dollars or so in total national debt and a war raging that is due to suck another few trillion from the US McCain doesn't propose to just increase the deficit like the fiscally irresponsible moron that he aims to replace does he?

I took the gas tax proposal out of McCain's economic speech. I do believe he has called for a one year pause on discretionary spending, and a review of all the programs under it's label. Also, he has stated he will refuse to sign any bill with appropriations allocated to earmark proposals. And he has called for a review and reduction in the area of subsidies, or so called "corporate welfare".

However, essentially I wanted to discuss the merits of this specific proposal, though it is important how it fits into McCain's larger budgetary plan.

I think your dad might have been wrong. My understanding is that the damage from large trucks completely eclipses road damage from cars. A highway designed to withstand 75,000 pound truck traffic doesn't seem like it would sustain much damage from a 3,000 pound car. Of course trucks have more and larger wheels to distribute the load on the highway but the pressure of the tires on the road from a loaded truck is still much greater than the pressure on the road from a car.

I think you are right, which could explain why diesel is taxed at a higher rate than unleaded.

 

[Kestrel]

First of all, I think you're conflating demand with quantity demanded. Second, you are still ignoring competition, which directly affects price; not all matters of economics simply boil down to supply and demand. Suppose, for example, there are X number of widgets for sale; as the price goes up quantity demanded falls (obviously), and as price goes down, quantity demanded rises. No controversy there. However, the price will vary depending on if ONE company (or cartel) owns all of the widgets (assume no substitutes) versus 10,0000 companies, each with similar stocks on hand. This is why if I go to Disneyland I can expect to be charged some obscene price for a bottle of water.

There are three levels involved in producing gasoline for consumers. Extraction, refining and distribution. As long as worldwide demand remains high, the OPEC cartel can use it's production quota system to prop up the price of raw oil extracted from the Earth.

Refining in this country is controlled by a small number of companies that already run their equipment 24/7. They can't just hire more workers and run another shift to increase production. The large capitol expense of building a new refinery serves as a barrier to new competition entering the field. As a result, there isn't a lot of competition at this level and profit margins are comfortably high.

Distribution of gasoline is a free market, with thin profit margins. But the other two levels of gasoline production don't operate that way.

 

[Cain]

There are three levels involved in producing gasoline for consumers. Extraction, refining and distribution. As long as worldwide demand remains high, the OPEC cartel can use it's production quota system to prop up the price of raw oil extracted from the Earth.

Not in dispute.

Refining in this country is controlled by a small number of companies that already run their equipment 24/7. They can't just hire more workers and run another shift to increase production. The large capitol expense of building a new refinery serves as a barrier to new competition entering the field. As a result, there isn't a lot of competition at this level and profit margins are comfortably high.

OK, not in dispute.

Distribution of gasoline is a free market, with thin profit margins. But the other two levels of gasoline production don't operate that way.

Tell me that I'm misreading your original argument, or something. I had taken what you said to mean that phasing out the gas tax would make no difference to the consumer, which seems completely wrong. If you want to argue oil companies will see greater profits, and it creates the wrong incentives, deprives the government of needed revenue, then I fully agree.

 

[kallsop]

Has anybody asked McCain what tax he would like to raise to make up for the tax that he proposes to eliminate temporarily?

He has proposed cutting income tax. Assuming that the overall economy is still operating to the right side of the Laffer curve maximum, as evidenced by the previous tax cuts, that will again increase federal revenue.

I think we all pretty much agree though that the real problems are on the spending side. Giving the DC mob more money is like giving booze to an alcoholic.

 

[Dan O.]

Tell me that I'm misreading your original argument, or something. I had taken what you said to mean that phasing out the gas tax would make no difference to the consumer, which seems completely wrong. If you want to argue oil companies will see greater profits, and it creates the wrong incentives, deprives the government of needed revenue, then I fully agree.

Why don't you do the math and see what you come up with. Assume that an area has a fixed supply of 100,000 gallons of gas per month, the current price is $3.00/g which includes $0.50/g in taxes and the short to intermediate term price elasticity of demand for gasoline is about -0.25 (meaning that for every percent rise in the price the demand will fall by 0.25 percent). What price will consumers be paying if the taxes are eliminated?