Raise the Gas Tax to Cut Oil Company Profits

Record high crude oil prices has put the federal gas tax in center stage, as McCain and Clinton have proposed a summer holiday of the 18.4 cent federal gas tax. Thomas Friedman blasted the short-sighted proposal, as well as our leader’s failure to create a coherent energy policy.

Calling it a meaningless “quick-fix” solution, Barack Obama argues the real solution lies in alternative fuels and higher fuel efficiency standards.

To that list I’d add increased investment in transit and a higher gas taxes, although I can understand why those proposals may not make it into a television ad in Indiana and North Carolina.

High gas prices don’t just effect consumers, they have resulted in record profits for oil companies. However, according to economic theory we should be doing the exact opposite of what McCain proposes if we want to cut their profits. Economists have found consumers pay roughly half the federal gas tax — the other half comes from the oil companies themselves. This study concludes:

Using the estimated coefficients, we can determine the incidence of federal and state specific taxes. An increase in the federal tax by 1¢ raises the retail price by 0.47¢ and decreases the wholesale price by 0.56¢. Thus, consumers and wholesalers each pay roughly half of the federal specific tax.

In effect, a higher federal gas tax would shift wealth from the oil companies profits to federal coffers, and help pay for badly needed infrastructure improvements.

Author: Rob Goodspeed


  1. Pingback: Colorado Living » Blog Archive » Economics as a Graduation Requirement (Why the Gas Tax Holiday is a Bad Idea)

  2. How does raising taxes lower gas prices? For the life of me I can’t see how this will work?
    As far as a tax holiday, think of all the summer jobs that kids won’t have if a gas abatement isn’t put into place. By the way, raising gas prices hasn’t reduced the number of miles we drive. Before you jump and say mass transit find one that isn’t located in the central business district that has over 50% ridership. I have yet to find one.

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