Everyone notices it. They struggle with it, fight to survive through it, and when push comes to shove, they end up paying it anyways. It is gas taxation. Taxes on gas hit wallets hard and drain bank accounts. The federal gas tax was a mere penny per gallon and first came into effect in 1932 as a temporary charge. Nine years later, the gas tax became permanent through the Revenue Act of 1941 in order to help fund the war effort and increased by half a cent per gallon. In 1959, President Eisenhower raised the tax to four pennies per gallon to fund his creation of the interstate highway system.
As of 2005, the federal gas tax alone is 18. 4 cents on the gallon. Unfortunately, gas taxes are a necessary evil and not only hit Americans at a Federal level, but at local and state levels as well. (Alter, 2008). Oregon led the states in taxing gasoline when they became the first state to do so in 1919. Every state followed suit throughout the years, and now the states are responsible for an average of 20. 8 cents a gallon since 2005. Local taxes are responsible for the rest of taxes accumulated per gallon. If one were to combine the various taxes piled on gasoline, Americans pay an average of 45.
9 cents per gallon. According to the U. S. Department of Transportation, this equates to approximately $271 paid yearly per every man, woman, and child in America. (Alter, 2008). So what affect does this gas taxation have on the U. S. economy? It is pretty obvious that consumers get the brunt end of taxation being the ones that have to break the piggy bank to pay them—especially during times when gasoline prices are so high. The taxes placed on gasoline do not really have to be a thoroughly considered issue because consumers must buy gasoline in order to go to work and make money to live.
No matter the price of gas and the amount paid in taxes, gasoline is a necessity. Consumers may conserve a little better and opt to carpool or walk more often, but the gasoline market will not flop until a more significant alternative is introduced. Government officials and researchers have been working around the clock to create a way to wean Americans off their addiction to gasoline, but no sufficient methods have surfaced yet. Gasoline is still in high demand and looks as though it will remain that way for many years. Taxes have a minimal affect on the demand for gasoline. No matter what the taxes are, someone will still buy it.
The gasoline, and oil industry in general, is inelastic because the quantity demanded only somewhat fluctuates with price changes. The most significant change in demand may be if an increase of taxes causes a dramatic spike in gas prices, causing people to panic and stockpile gasoline at the lowest price possible before the prices raise too high. The government tried to use taxes on gasoline to motivate people to consume less gas, but research has only shown that taxes do nothing but consume more from people’s wallets. The demand for gas remains the same or even increases, instead of decreasing as the government hoped.
Gasoline taxes would not have a significant effect on supply unless a price control was enforced by the government, such as the price increase of crude oil enforced in 1973 by the Organization of Petroleum Exporting Countries (OPEC). This increase of price for oil, which is an input in producing gas, made gasoline less available. A shortage occurred because gasoline producers were not willing to pay more for the oil used to stay current with the demand. As the supply level decreased, the demand for gasoline increased. People were waiting for hours at the pump to get gas and as people saw how scarce gasoline had become, they demanded it more.
(Mankiw, 2004). When taxes change, the equilibrium price will rise because of the decrease in overall supply and the increase in demand. In turn, this changes the quantity because gas is not a renewable resource. It is not sustainable; therefore, it will eventually run out. The more gasoline is demanded, the less gasoline will be available in the future. So, what affect will a price control, such as a price ceiling, have on this obligatory good? As previously mentioned, politicians and economists have been running through lists of hypothetical methods to help citizens adjust and survive with the increase in gasoline prices.
One idea proposed in early 2008 by republican John McCain and democrat Hilary Clinton was a gas tax holiday for the summer of 2008. This tax holiday would serve as a temporary price ceiling of zero dollars on gas taxes. Sounds like a nice idea, huh? Well, most economists did not support this idea and saw it only as “a direct transfer of money from motorists to oil companies (Alter, 2008). ” It was believed that the tax holiday would only encourage oil companies to raise gas prices to compensate for the taxes taken out by the holiday.
Furthermore, the American Association of State Highway and Transportation Officials claim that only $30 would be saved by cutting out taxes for this short period. The nation’s roads and highways would suffer the most because cutting the taxes means cutting the funds to America’s roads. In addition, about 300,000 construction jobs would be lost because of the lack of funds to the repair of roads and highways. Therefore, while it may have sounded like a nice idea, it was really just a $30 credit traded for 300,000 jobs.
Does not sound like a very efficient trade off since our economy would only suffer further from such as dramatic increase in unemployment for a few measly dollars. (Williams, 2008). ? References: Alter, J. (2008). A tax holiday to nowhere. Retrieved October 1, 2008, from EBSCO Host database. Mankiw, N. G. (2004). Principles of economics (3rd ed. ) Ch. 6. Chicago, IL: Thomson South-Western. Williams, J. (September 13, 2008). Local, state, and federal gas taxes consume 45. 9 cents per gallon on average. Tax Foundation. Retrieved October 2, 2008, from http://www. taxfoundation. org/publications/show/1054. html.