Palin’s Gas Tax Moratorium In Effect
Governor Palin’s one-year moratorium on (state) motor fuel taxes is now in effect; see this official announcement. As many of you will recall, when John McCain proposed this for the summer (at the federal level), he was lambasted by his critics.
The controversy was over how much of the elimination of the federal 18.4-cent-per-gallon tax on gasoline would show up as a reduction in prices motorists saw at the pump, versus how much of it would be pocketed as extra profit by the gas stations. (See this pdf for a conservation group opposed to Palin’s move on these very grounds.) Some of you may have horrible flashbacks of this section in Principles of Micro, where we sadist economics professors would draw different supply and demand curves (some steep, some shallow) to show that the “incidence” of an excise tax depends on the elasticities of the producers and consumers. Intuitively, the side of the market that is more able to move away, bears less of the brunt of a new tax. (This is why cigarette taxes are almost paid entirely by smokers, rather than lower earnings for producers.) Going the other way, when such a tax is lifted, the more inelastic side of the market benefits the most.
Based on some back-of-the-envelope estimates I had seen, I predicted at the time that McCain’s plan (also endorsed by Senator Clinton when she was still in the running) would have been split about 50-50 between motorists and gas stations. I.e., of the 18.4 cents per gallon that the feds were no longer skimming off the top, I figured motorists would see posted pump prices fall about 9 or 10 cents, while the owners of the gas stations would retain an extra 9 or 10 cents in earnings, per gallon sold.
Governor Palin’s recent move apparently provides an excellent experiment to test these ideas: Specifically, will Alaskan motorists see lower pump prices? Unfortunately, the Alaskan state motor fuel tax was only 8 cents per gallon, so we don’t have that much of an effect to be looking for. Also, we have to do it right: Just because prices fall the day the tax cut goes through, for example, doesn’t prove that Palin’s moratorium is responsible. Oil prices are falling because Gustav isn’t wreaking too much damage on oil platforms in the Gulf, for example, and so (if gas prices fall in Alaska over the next few days) maybe that would be the reason.
Ideally, you would want to look at something like, the spread between average Alaskan gas prices versus the US average. If the spread falls starting on September 1, then that would be evidence that Palin’s cut is translating into relief for motorists. Yet even here you need to be careful; what if historically, that spread always falls as we move away from the summer driving season?
This stuff gets really complicated, really quickly. I’ll post an update here once we let some time pass and more data roll in. In general, I favor any and all tax cuts, for the simple reason that it’s less money the government is taking from the people who earned it.
