May 16, 2008
Fuel taxes have recently become a hot topic in the presidential campaign and in the media. Everyone has an angle on this issue. Environmentalists worry about the effect of gas consumption on the environment and want to use the tax to change consumers' behavior; motorists express outrage at the price they have to pay to fill up their tanks and demand tax relief; presidential candidates focus on the impact of the tax on the "middle class," and some politicians tell constituents and voters that government intervention is the only solution; some policymakers and media claim that big oil companies aren't paying their fair share and demand windfall profits taxes; and, finally, economists ask, What is the purpose of this tax, anyway?
The purpose of the gas tax is simple: to raise revenue for building and maintaining roads and related infrastructure. This approach conforms to what economists call the "benefit principle" of taxation, which stipulates that consumers of government services should pay in proportion to the benefit they obtain from those services. It follows that the revenue raised from a tax that adheres to the benefit principle should be used solely to provide the good or service on which the tax is levied. Therefore, if gas taxes are paid by the individuals who benefit most from roads (drivers) and if the revenue is used solely for road building and maintenance, then the tax is a good one.
However, there is also the question of whether gas taxes should be used to decrease fuel consumption in order to protect the environment and reduce pollution. Pigouvian taxes, named after Arthur C. Pigou, a renowned English economist from the early 20th century, are taxes that attempt to make up for undesirable side effects of certain industries—what economists call "negative externalities." Pigouvian taxes are controversial and often difficult to calculate; they complicate the gas tax debate considerably.
A number of Tax Foundation publications and blog posts can help clarify the issue. Tax Foundation President Scott Hodge's Tax Gouging at the Pump and Record Taxes Paid before Record Oil Profits explain that oil companies actually pay more in taxes than they earn in profits, contrary to some people's notion that "greedy" oil companies are raking in huge profits without paying their fair share of taxes. The Tax Foundation Background Paper Paying at the Pump: Gasoline Taxes in America provides an in-depth look at the history and use of gas taxes (send us an e-mail if you'd like a free hard copy). The Fiscal Fact Questions to Ask before Raising the Federal Gas Tax presents a concise discussion of the role of fuel taxes. The Distributional Impact of Windfall Profits Taxes and a Gas Tax Holiday shows how much money taxpayers in each income group stand to gain or lose under the gas tax proposals put forth by the presidential candidates.
In addition, the Tax Data section of our website contains a section on gas tax charts, which includes the following:
Click here for more Tax Foundation studies and blog posts on gas taxes.
Advisors to the three presidential campaigns appeared at a Tax Foundation conference in Washington, D.C. Tuesday, April 29. Brian Deese represented the Clinton campaign, Kevin Hassett the McCain campaign and Dan Tarullo the Obama campaign. The spokesmen avoided controversial statements, and the audience of think tank personnel and reporters focused on questions of policy. Some subjects that drew attention were the McCain and Clinton plans for a temporary gas tax holiday, and the Obama plans to raise taxes on capital and wage income even above what Senator Clinton would.
Three panels of issue-area experts spoke before the campaign spokesmen, on climate change, health care and tax reform. The climate speakers were William Pizer, Resources for the Future; Nikki Roy, Pew Center on Global Climate Change; and Robert McNally, Tudor Investment Corporation. Addressing health care reform were John Sheils, The Lewin Group; Joe Antos, American Enterprise Institute; and Len Nichols, The New America Foundation. The tax reform panelists were Alex Brill, American Enterprise Institute; Len Burman, Tax Policy Center-Urban Institute; and Scott Hodge, President, Tax Foundation. The conference was sponsored by American University, the Committee for a Responsible Federal Budget, the New America Foundation, and the Tax Foundation.
A video of the conference is available here, and photos can be viewed here.
There has been considerable debate in recent weeks over what the federal government should do about the higher price of gasoline. Each of the three presidential candidates has put forth a proposal. Barack Obama would impose a windfall profits tax on U.S. oil companies based upon the price per barrel of oil. Hillary Clinton and John McCain both propose a temporary gas tax holiday which would repeal, from Memorial Day until Labor Day, the federal gas tax (18.4 cents) and the federal diesel fuels tax (24.4 cents). Such a holiday would cost approximately $9 billion. Hillary Clinton would pay for the gas tax holiday by imposing a windfall profits tax.
Both the windfall profits tax and the tax holiday represent poor tax policy, and neither is as simple as it sounds. A new Tax Foundation Fiscal Fact, "The Distributional Impact of Windfall Profits Taxes and a Gas Tax Holiday," explains why these plans do not make sense from the standpoint of sound economic policy. The study also shows how both plans would affect each income quintile—that is, how much money taxpayers in various income groups would gain or lose under each plan.
Read the Fiscal Fact. Click here for more on gas taxes. Click here for more on tax holidays and windfall profits taxes.
In May, the U.S. Supreme Court will decide whether to hear the case of Centerior Energy Corp. v. Mikulski, an appeal from a lower court decision opening the door to fragmented state-by-state interpretations of the U.S. tax code. The Tax Foundation has filed a friend of the court brief urging the Court to take the case, which raises the question of whether taxes paid to the government can be recovered from a business instead of from the IRS.
Click here to read the brief.
Click here to read the Fiscal Fact, a short explanation of the issues in the case and the arguments in the brief.
Click here for more amicus briefs filed by the Tax Foundation.
Click here for more on the Tax Foundation's Center for Legal Reform.
Most people have heard of Tax Freedom Day by now. For those who haven't, Tax Freedom Day is the day on which Americans have earned enough money to pay all their federal, state and local taxes for the year. On Tax Freedom Day, we have earned enough to pay the government and we can finally start keeping our paychecks for ourselves and our families. It's a great way to illustrate how much the nation as a whole pays in taxes. We also calculate a Tax Freedom Day for each state.
In 2008, Tax Freedom Day falls on April 23, which means Americans must work from January 1 until April 23—nearly a third of the year—just to pay taxes. That's more than we spend on food, clothing and housing combined.
Every year we publish a report explaining what Tax Freedom Day is all about and how we calculate it. The report is available here (if you'd like a hard copy, just send us an e-mail with your name and address) and a paper explaining the methodology is available here. This year, in addition to the Tax Freedom Day report, we thought it would be fun to illustrate the concept in a different way. So if you're done reading the report and you want to experience Tax Freedom Day in a whole new way, click here and take a look at our new YouTube video.
With the 2008 election in full swing, a number of key domestic policy issues have come to the fore. Whether it is addressing health care reform, economic issues, climate change, or reforming the tax code, a lively debate is unfolding amongst the three remaining candidates. However, given the nature of the primary process, it is difficult to take an in-depth, side by side look at the various policies and plans of Senators Clinton, Obama and McCain.
Please join us for lively discussion on the domestic policy plans of the Presidential candidates at a half-day conference sponsored by American University, the Committee for a Responsible Federal Budget, the New America Foundation, and the Tax Foundation on Tuesday, April 29th from 8:30 a.m. to 12:30 p.m. Held at the Sewall-Belmont House and Museum, this forum includes top advisers to the campaigns, as well as leading policy experts from across the political and ideological spectrum. The event will examine the differences and similarities of the domestic plans, and explore the impact they would have if implemented.
Click here to view the details and to RSVP. Click here for a chart comparing the tax plans of Clinton, McCain, and Obama.