Tuesday, May 6, 2008

Would consumers benefit from a gas tax holiday?

All the economists who are theorizing about the effects of a federal gas tax holiday apparently forgot to read the empirical literature on the topic. In 2000, the Illinois State Legislature suspended the 5% gasoline sales tax. In response,
..retail gas prices are found to drop by 3% following the suspension, and increase by 4% following the reinstatement...
This would imply a pass-through rate of about 70%. Ironically, a certain junior senator from Illinois thought that this was a good idea at the time.

2 comments:

  1. Yes, but that junior Senator has stated that he has learned from his mistake after seeing the results. That is a major reason why he doesn't support the tax holiday now.

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  2. Frazer MiddletonMay 14, 2008 at 2:56 PM

    Potentially dumb question alert. It would be political suicide, but shouldn't the fed increase the gas tax? Could be a good first step in taxing the consumer's carbon footprint.

    Assuming rational actors, increasing tax on gas would drive (no pun intended) people to consume less of it, and potentially lead to consumers buying new, more fuel efficient, vehicles...

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