Clinton, McCain Push Gas Tax Break Economists Panned (Update1)

By Alison Fitzgerald

May 2 (Bloomberg) -- Hillary Clinton and John McCain are both pushing a ``gas-tax holiday'' to give consumers an 18.4- cent-a-gallon price break. Clinton says the plan will take excess profits from oil companies. McCain says it will help families buy school supplies.

Economists have a different take: They say the oil companies may end up the biggest beneficiaries, while the aid to families wouldn't be enough to buy a $35 backpack.

The trouble with the plan, they say, is that oil prices are rising because of low supplies, and companies will continue to charge the average $3.60 a gallon and just pocket the money that would have gone to federal taxes.

``That's $10 billion, and it's going into the pockets of oil refiners,'' said Leonard Burman of the Tax Policy Center in Washington. ``The last time I checked, they didn't need it.''

Supplies are ``being cleared at the current price,'' said Donald Parsons, an economics professor at George Washington University in Washington. ``If you take away the tax, you'll have the same number of consumers willing to buy the gas at the same total price.''

Senator Clinton, 60, a New York Democrat, embraced the proposal that McCain, 71, an Arizona Republican, floated in a speech on April 15. McCain's idea originated not with his economic advisers but with Republican pollster Bill McInturff.

``I don't know any prominent economist who favors this McCain-Clinton proposal,'' Greg Mankiw, former chairman of President George W. Bush's Council of Economic Advisers and author of a bestselling economics text, said on his blog.

Populist Appeal

Economists say that while the populist proposals appeal to consumers struggling to make ends meet, the voters will be disappointed when the moves don't work.

Senator Barack Obama, who's also running for the White House, has a proposal that would take money out of the pockets of oil companies and put it in the hands of the poor.

The Illinois Democrat has proposed a windfall-profits tax that could cost oil companies $15 billion a year at current profit levels, according to Jason Grumet, a campaign adviser. The plan, which would impose a tax on each barrel of oil over $80, could cost oil producers three times the $50 billion, 10-year windfall-profits tax Clinton has proposed.

Obama would use the money to help pay for a $1,000 tax cut for working families, expand the earned-income tax credit and aid people in paying their energy bills.

Still, it's the gas-tax holiday that's getting the most attention on the campaign trail.

$11 Billion Profit

A day after she was photographed filling up the tank of a steelworker's pickup truck in Pennsylvania, Clinton yesterday used the occasion of Exxon Mobil Corp. announcing an $11 billion quarterly profit to push the idea of a gas-tax break for the seventh day.

She said her proposal would save the average family $70 this summer, and that she would ensure the oil companies will pay through her windfall-profits tax.

Senator McCain said he wants to give consumers a little extra to spend. ``I'd like to see families in America have a relief from ever-increasing costs of gasoline so maybe at the end of the summer, after this tax holiday, they could buy school supplies for their children,'' McCain, the presumptive Republican presidential nominee, told reporters in Cleveland.

The savings might not cover many of those back-to-school expenses.

$18 a Month

If the entire federal tax cut passed through to the price at the pump, the cost of filling up a 20-gallon tank would fall $3.68 to $68.72. Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc., said families would save only about $18 a month. Burman estimated the total savings from Memorial Day to Labor Day at $28.

``Even if it worked, it would be chump change,'' he said.

New York Mayor Michael Bloomberg said the proposal was ``about the dumbest thing I've heard in a long time from an economic point of view.''

``We're trying to discourage people from driving and we're trying to end our energy dependence,'' Bloomberg told reporters at City Hall in New York.

The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

House Financial Services Committee Chairman Barney Frank called the proposal a ``bad idea.''

`Counterproductive'

``I think it would be counterproductive,'' Frank said in an interview on Bloomberg Television's ``Political Capital With Al Hunt,'' to be aired later today. ``I don't think it would be a significant savings for the individual. It would be more of a cost.''

Obama has refused to back the tax holiday proposal, saying it doesn't address the fundamental problems with U.S. energy policy.

``I think this time Obama had it right,'' Bloomberg said.

Lawmakers in Washington haven't embraced the idea either. House Speaker Nancy Pelosi yesterday said she won't support it.

Clinton introduced a bill in the Senate today to enact the gas-tax holiday, Clinton campaign spokesman Mo Elleithee said.

To contact the reporter on this story: Alison Fitzgerald e-mail Afitzgerald2@bloomberg.net .

Last Updated: May 2, 2008 13:40 EDT

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