Update: Just found out that Obama supported gas tax holidays too, although it was during his time in the Illinois state senate. Thanks to Buck Naked Politics for the info!

Just as Hillary Clinton is beginning to rise in the national polls thanks to a surge of momentum from her win in Pennsylvania she manages, like so many times before this campaign season, to shoot herself in the foot.

People may not be outraged about it, and it may not stir emotions like Obama’s current problems with Rev. Jeremiah Wright, but her recent proposal for a gas-tax holiday this summer (also proposed by John McCain–you might know him) has stirred up more than a little controversy. Top Democrats, like the Majority Leader in the House, have even lined up against the idea. Obama is enjoying telling voters that Hillary’s proposal will cost the government millions and save taxpayers only about $30 each.

Hillary’s side of the story seems to make sense at first, and I’m sure her campaign thought reasoning like what Buck Naked Politics’ D. Cupples summarizes here, would be very persuasive to middle class voters pinched by gas prices right now.

There’s just one problem: it won’t work.

Paul Krugman, the New York Times columnist, takes Hillary’s proposal to task in a recent article. The Washington Post’s Fact Checker has a great in-depth analysis of the economics behind the issue. If you take my word for it, here it is short and sweet: lower price = more demand and more demand will lead right back to higher prices because supply cannot be expanded. There simply isn’t enough oil.

The Machiavellian argument that Hillary knows it won’t be that effective, but it will win her more votes is okay with me, I support her and would like to see her win. But, that argument appears to fail as well. Fact Checker tell us that when a similar policy was tried in Illinois:

A poll by the Chicago Tribune showed that only 28 percent of motorists believed that they were actually paying less for gas as a result of the temporary suspension of the tax.

Not a significant enough part of the electorate to make a difference.

Across the Aisle features a great article by Brian Vogt discussing Hillary’s proposal and then suggesting some more sensible ways to deal with the gas price problems facing America. Essentially, inflate your tires properly (which will improve fuel efficiency by up to 10%) and let the government and private industry develop some long-term technological solutions that will reduce our dependency.

I agree, but I would argue that fixing the dollar crunch and managing the economy better to preserve consumers’ purchasing power would also go a long way to fixing this problem as well. A large rise in oil prices can be directly attributed to the falling dollar.

There is one aspect of Hillary’s proposal that people aren’t discussing that troubled me greatly (and Obama agrees with Hillary here). Again, from Buck Naked Politics:

That’s why I have called for making Exxon and other oil companies with record profits pay the federal gas tax this summer… I believe we should impose a windfall profits tax on big oil companies and use that money to suspend the gas tax and give families relief at the pump.

Now maybe it is just me, but windfall profits taxes always make me nervous. Sure, Exxon alone made over $40 billion in profits last year, but the market determines the price of gasoline, not Exxon. Exxon is simply the beneficiary of rising oil prices and the success of the OPEC cartel.

Here are some arguments against a windfall tax. My favorite:

The Tax Foundation’s Jonathon Williams and Scott Hodge remind us of more very unintended consequences:

… according to the Congressional Research Service (CRS), is that the 1980s windfall profits tax depressed the domestic production and extraction industry and furthered our dependence on foreign sources of oil.

So here’s to Hillary proposing two policies that in all likelihood will sacrifice meager short-term relief ($30 over 3 months) in exchange for:

• A high likelihood of rising prices later
• Decreased oil production
• Weakened support for alternative technologies (in the short and middle term)
• Further dependence on OPEC oil
• No additional political support

I’ll keep my $30 Hillary (maybe even donate it to your campaign so you can hire a new economic adviser). Let’s try to find a more creative solution. I know you can, and have, done much better. As Paul Krugman writes:

I don’t regard this as a major issue. It’s a one-time thing, not a matter of principle, especially because everyone knows the gas-tax holiday isn’t actually going to happen. Health care reform, on the other hand, could happen, and is very much a long-term issue — so poisoning the well by in effect running against universality, as Obama has, is a much more serious breach.

ShareThis

Lawmakers are complaining that oil executives are exploiting consumers through artificially inflated oil and gas prices.

This is an odd criticism for politicians to make, considering they reap those very oil company profits to finance their campaigns–oil and gas contribute upwards of $20 million a year to political campaigns.

Of course, it looks good to stand up on C-SPAN for the whole world to see and fight for the American consumer. But please, if you would Big Oil CEOs, leave your donations for our political campaigns at the door on your way out…

ShareThis

Image courtesy of www.dellfreedomriders.com

Anyone who has been to a gas pump lately can attest to the impact of rising energy prices. The price of oil rising to record highs hardly qualifies as news, but it does beg the question–what are some of the wider effects we will see from rising gas prices?

Some of the biggest consumers of fuel are local governments. Metro systems, school buses, and police cars are just a few of the major sources of fuel expenditures that local districts face. The Washington Post published a great article a few days ago about the pressure local budgets are facing due to rising fuel costs. Despite not having to pay fuel taxes and creative ways of purchasing fuel to save money, some local governments are at a breaking point. As prices increase much more rapidly than the expectations of local governments, these governments are faced with hard decisions–reducing police patrols or bus service to disabled or the elderly. (Interestingly, private consumers may be being hit by a double-whammy as a lot of new roads being constructed in urban areas are toll roads–to reduce traffic congestion–as part of a new transportation philosophy championed by the Bush administration)

In the few areas local governments could shift to other modes of transportation, they will also face rising costs on air fare as well. United recently hiked air fares across the board up to $50 to deal with rising fuel costs of its own–a move speculated to be copied by airlines across the industry. In short, transportation will continue to eat up a larger portion of local governments’ budgets–continuing to exceed even the anticipated price hikes built into those budgets.

Aside from the obvious issues consumers face through increased fuel prices, lets look at a few less obvious ways that these higher fuel prices could affect government services and those that rely on them.

Fewer Police Patrols

Rising fuel costs mean that local governments will have to struggle to keep their police cruisers fueled. Aside from switching from gas-guzzling SUVs, police forces have little options open to maintain a police presence and expend less fuel. A particular problem may arise if police forces opt for reducing presence in areas with lower property values (aka poorer) in order to avoid leaving citizens responsible for paying higher taxes feeling unprotected. Of course lower police presence also could lead to a spike in petty crime–increasing insurance rates in some areas.

Decreased Bus Coverage

This could, paradoxically, force some people into driving in order to get to work on time. It could also lead to some people being unable to reach their job, or having to look for employment closer to home. Obviously this is particularly damaging for people dependent on buses, because they already have less financial flexibility.

School District Shifts

School districts that are particularly spread out and face large busing costs, and are typically already financially stretched, may have to start reducing other services within the school, freeze wages, and put off maintenance for school facilities to allow room in the budget for increased transportation costs.

Inflexibility

A major problem is that many of these local governments were already stretched thin, leaving them unable to shift toward more fuel-efficient transportation options. Purchasing more fuel efficient vehicles and optimizing current vehicles for fuel efficiency are capital intensive tasks, and local districts will have difficulties raising the capital to accomplish this.

Positives

There are some positive aspects of the increase in fuel costs. Local governments may feel the crunch, but they will be forced to become more efficient, while also taking steps toward reducing fuel waste. If price hikes are sustained for a reasonable amount of time (a year or so) even if prices come back down it is likely that governments would keep their expense reduction schemes in place to hedge against future price increases. This not only decreases the carbon footprint of local government (good for Mother Nature) but it also increases the fiscal efficiency of the local government (good for Joe and Jane Taxpayer).

Another glass-half-full way of looking at the crunch on local government funds due to fuel costs is that it may force local governments to be more innovative in the delivery of their services–for example by implementing some e-government services–and driving a more consumer oriented form of service delivery to their tax payers. E-government seems to be a place where local governments could see the most gains, and blogger Che Tibby has an interesting way to conceptualize the provision of e-government services online.

ShareThis