Dedicated to the proposition that Nancy Boyda is a one termer.

Friday, June 1, 2007

It's Simple Economics

Nancy Boyda announced she was supporting a bill to suspend the federal gas tax when prices rose above $3 a gallon (this is not new, Republicans bounced this around in the last Congress).

Money from gas taxes pays for roads, bridges and other transportation needs. Boyda realizes this and says this bill will make up for the lost tax revenue by rolling back tax breaks for big oil companies. Boy, now doesn't that sound good. Let's lower the taxes on drivers and raise the taxes on evil big oil companies. What a great sound bite.

Now, for a brief lesson in economics. Oil companies are in business (like other businesses) to make money. If as an oil company your tax burden goes up and you wish to continue making the same profit margin, what are you going to do? You will raise your prices (or possibly lay off workers to save labor costs which is not only bad for the economy as a whole, try explaining to those families that they lost their jobs because you were just trying to help them save $200 in gas money).

Now, let's say a gracious oil company board decides they will take the lost revenue and keep all their employees in the name of public good to lower your driving costs, what do you think will happen? These companies are publicly owned, traded on the stock exchange, so if you or I own mutual funds or have some other stock-based retirement plans, many of us at least indirectly own some shares of oil company stock. As revenue drops the shareholders will either sell shares, causing the company to have to buy back its de-valued stock, or they will demand the board do something to fix the situation. The board will then either have to raise prices, lay-off workers, or be voted out at the next shareholder meeting.

As with most things the government tries to "fix" by creating negative tax incentives or regulations, this plan won't work.


Anonymous said...

the point missed by "bounce boyda" is that the price of gas has nothing to do, currently with anything other than profit margins, not a supply problem or anything of the sort. my guess: oil companies want to keep their taxes as low as possible, and will do what they need to do to make sure that happens

Anonymous said...

You are missing the point, not Bounce Boyda. Sure the price of gas has to do with profit margins. Oil companies have a profit margin they desire to hit, that's what Bounce Boyda said, they are in business to make money. When the cost of getting the fuel to the gas stations goes up (caused by things like refineries having to temporarily shut down to switch to summer blends caused by government regulations, or when OPEC announces they will not increase supply despite higher consumption in the summer months, or when we are adding to the strategic reserve, seriously, don't you read a newspaper?), oil companies will indeed raise prices to meet their profit margins. It's the simple economics Bounce Boyda was referring to.

Second, we all want to keep our taxes as low as possible and will do anything to make sure that happens.

Third, let's remember, the environmentalist wing of the Democrat Party wants to dramatically raise gas taxes to discourage consumption. i.e. if it were President Gore right now, our gas prices could very well be 50 cents a gallon higher.

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