Gas tax holiday wouldn't help U.S. drivers much

By Tom Doggett - Analysis

WASHINGTON (Reuters) - U.S. drivers are likely to see little, if any, benefit from a suspension of the federal gasoline tax because there is no guarantee the savings would be passed on at the pump and cheaper fuel would only increase gasoline demand and ultimately drive up prices.

To give consumers some relief from record fuel prices, Republican presidential candidate John McCain and one of his Democratic rivals, Hillary Clinton, want to suspend the 18.4 cents per gallon tax on gasoline and the 24.4-cent tax on diesel fuel for the summer.

Democratic presidential candidate Barack Obama opposes the idea, saying it would not amount to much. House Democratic leaders have also shown little support for suspending the tax.

Waiving the fuel tax for the summer might be a good political move, but the average family would still have a tight budget after saving at the most about $30 in gasoline costs.

"A gasoline tax holiday is a mirage of price relief for consumers," said Daniel Weiss, an energy expert at the Center for American Progress in Washington.

President George W. Bush said this week he was willing to consider suspending the fuel tax. But U.S. Energy Secretary Sam Bodman said there would be only "marginal" benefits to consumers by waiving the tax. "I think it's going to be a small temporary reduction in prices," he told reporters this week.

Weiss said drivers should not assume they would receive a full price reduction of 18.4 cents a gallon at the pump if the government's tax is waived -- especially when service station owners, who now earn only a few pennies off each gallon of gasoline sold, would have a rare opportunity to increase profits.

"It's up to each service station operator to lower the price by whatever amount they choose," he said. "They don't have to lower it at all."

Weiss pointed out that if a service station has few competitors on a stretch of highway, the owner has few incentives to lower fuel prices.

Even if all the tax savings were passed on to drivers, the price break would be temporary as gasoline use would rise.

"The benefit to consumers would be mitigated because eliminating the tax would increase demand, and when you have an increase in demand you have an increase in prices," said Tancred Lidderdale, an analyst with the federal Energy Information Administration.

Lidderdale also said any tax relief could be wiped out early because gasoline consumption picks up in the summer from vacation travel and retailers start selling expensive, cleaner-burning gasoline that the government requires for the season.

"The tax cut would simply offset some of the normal season increase in prices, because of rising demand and the switch to summer-grade gasoline," he said.

The National Association of Convenience Stores said its service station owner members would not see a big payday from dropping the tax, but instead would face problems implementing the relief.

Wholesale gasoline prices can change four or five times in a day, which would make it difficult for the stations to reduce fuel prices by 18.4 cents a gallon, according to John Eichberger, the trade group's lobbyist. "We know what's going to happen. Everybody and their mother is going to cry 'price gouging,'" he said.