Tax cut could push gas prices higher

Despite claims from McCain and Clinton, temporary cut in gas taxes could lead to more demand and push prices higher - leaving taxpayers to cover shortfall.

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By Steve Hargreaves, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Two presidential contenders are calling for a temporary suspension of the federal gas tax, a move that experts say will do little to help motorists and could actually push prices higher.

Democrat Hillary Clinton has joined Republican John McCain's call for a hiatus in the 18.4 cent-a-gallon federal gas tax between Memorial Day and Labor Day - a period when vacationing Americans spend the most time on the road.

"Record oil prices are contributing to higher energy prices, food prices and a squeeze that is making many middle-class families feel like they are falling further behind," Clinton said in a statement on her Web site. "Suspending the gas tax will provide real, immediate assistance to American families and for our economy."

McCain, his party's presumed nominee, called for suspending the gas tax earlier this month.

"The effect will be an immediate economic stimulus - taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up," said McCain.

Pay now, or pay later

For sure, drivers would save a few dollars when they fill up. Assuming the average gas tank holds 13 gallons, removing the 18.4 cent-a-gallon tax would save drivers about $2.35 every time they filled their tank.

But, of course, overall tax revenue would decline. The federal government collects about $38 billion a year in gas and diesel taxes, with state and local governments bringing in about $78 billion more, according to the Federal Highway Administration.

Most of the money is used to fund highway projects. Suspending the gas tax during the summer would leave a funding gap of about $10 billion.

Analysts - and Democratic presidential frontrunner Barack Obama - said the proposal would do little to stimulate the economy or lower gas prices and could leave roads in disrepair.

"It's a quick fix for people who believe cheap gas is their birthright," said Tom Kloza, chief oil analyst at the Oil Price Information Service, a research firm. "It's not a prudent thing to do."

Kloza said the amount of money motorists would save would do little to stimulate economic growth. The revenue from the gas tax is much needed for road repairs, he added.

Reducing demand is one of the best ways to lower gas prices, Kloza said. And suspending the gas tax may encourage motorists to drive more - pushing up prices and benefiting few but the oil companies.

"Look, somewhere down the road you have to use less," said Kloza. "As painful as it might be, higher prices do sway behavior toward a more energy disciplined America."

States could be hit hard

A House Democratic staffer, interviewed shortly after McCain's announcement, also criticized the proposal, largely on the grounds that state transportation departments may not be able to cover the loss in funding and construction projects would be suspended.

"If you turn that off, a lot of construction projects won't take place and a lot of people will be put out of work," said Jim Berard, a spokesman for the House Transportation and Infrastructure Committee.

The McCain campaign said the lost revenue would be paid for by money from the general fund, and that McCain's Senate staffers were drafting a bill.

Berard said that with $110 billion in economic stimulus payments already approved, and a large budget deficit, he wasn't sure Congress would shift money from the general fund into the highway fund.

For her part, Clinton said the shortfall would be covered by raising taxes on Big Oil, a move that has recently been tried and rejected in Congress.

If money from the general fund is used, it could in some ways be a fairer tax. The gas tax is a flat tax that impacts poor people more than rich ones, while money from the general fund is raised in a system where people who earn more are supposed to pay more.

James Kvaal, a fellow at the Center for American Progress, a liberal think tank, expressed concern about where money for infrastructure costs would come from if the tax was suspended. But he added that it would "help some families that are facing higher energy costs."

- This is an updated version of a story published on April 15

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