IE 11 is not supported. For an optimal experience visit our site on another browser.

GOP tax rebate plan called costly, ineffective

A GOP proposal to send $100 tax rebates to offset the high cost of gas has been roundly criticized not only by Democrats but also by fiscal conservatives who warn it will widen the deficit while doing little to encourage energy conservation.
Senate Republicans Propose Gasoline Bill
Senate Majority Leader Bill Frist (center) takes questions from reporters during a press conference with fellow senators where First announced the Gas Price Relief and Rebate Act of 2006, April 27.Joshua Roberts / Getty Images file
/ Source:

For a nation "addicted to oil," as President Bush put it, Senate Republicans have a proposal that can only be described as enabling: Put $100 back into the pocket of every taxpayer.

The proposal, unveiled Thursday, has been roundly criticized not only by Democrats but also by fiscal conservatives who warn it will widen the deficit while doing little to encourage energy conservation.

"It could be one of the dumbest ideas of the year," said Jerry Taylor, a senior fellow at the conservative Cato Institute. "I haven't looked at all of the ideas yet, but it's got to be right up there."

Taylor pointed out that as proposed, the rebate would go only to people who paid federal income tax last year, meaning it would be no help at all to the millions of low-income Americans who pay no income taxes but arguably suffer the most in times of rising fuel prices. About 100 million taxpayers would qualify for the rebate, which would be limited to filers with incomes under $150,000 for couples or about $100,000 for singles. It would cost more than $10 billion.

Not only that, but the same tax rebate would go to the Wall Street trader who takes the subway to work every day and to the rural Wisconsin farmer who uses thousands of gallons of fuel in his business, Taylor noted.

"It's not really a compensation for higher gas prices," Taylor said. "It's simply a please-vote-for-me-in-November payment."

John Berthoud, president of the National Taxpayers Union, which like Cato generally supports lower taxes and a more limited government, described the GOP proposal as "almost 100 percent political pandering."

David Sandalow, environment scholar with the generally left-of-center Brookings Institution, said the plan "would pass the bill for higher gas prices onto our children."

"We are running a huge deficit today, and sending out checks from the government to taxpayers and increasing the debt to do it doesn’t solve the basic problem – it merely avoids dealing with it." he said.

In addition to the "gas tax holiday rebate," the Senate plan would eliminate certain tax incentives that benefit oil companies, authorize more research into alternative energy and open part of the Alaska National Wildlife Refuge to oil drilling.

“This is a short-term important Band-Aid to a wound that is bleeding and it is beginning to hemorrhage,” Senate Majority Leader Bill Frist said in promoting the "Gas Price Price Relief and Rebate Act." Political analysts said the proposal was unlikely to be passed into law, although Senate leaders are hoping to bring it to a vote next week.

Democrats said the plan was doomed to failure because Republicans attached the rebate plan to opening up the sensitive Alaskan waters to drilling, an idea that repeatedly has failed to pass Congress in recent years.

But they were careful not to come out against the tax rebate idea itself. "The $100 rebate -- no one's against that," said Sen. Charles Schumer, D-N.Y. "But what's going to happen five months from now and 10 months from now and 15 months from now, when the price stays high because they haven't touched Big Oil?"

Sen. Debbie Stabenow, D-Mich., suggested mailing out $500 checks -- the amount the average family will spend in extra energy expenses this year, she said.

While mailing out billions of dollars in cash would offset some of the economic pain of higher gas prices, few people would argue the economy needs much of a boost, right now. The government reported Friday that the economy grew at a 4.8 percent rate in the first quarter, its fastest pace in two and a half years.

The economy is expected to slow later in the year, but Federal Reserve Chairman Ben Bernanke said in congressional testimony Thursday that "the prospects for maintaining economic growth at a solid pace in the period ahead appear good."

Even with the price of oil at more than $70 a barrel, compared with about $44 a year ago, the impact on the economy is muted because energy costs are a relatively small part of the $11 trillion U.S. economy. The rising cost of energy is likely to slow growth by "a couple of tenths" of a percent over the next two years by cutting into consumer spending, said Bernanke.

"I don’t think the economy needs goosing," said Berthoud. "If you you want to increase economic results over the long term, you should reduce marginal tax rates and reduce the disincentives the government is placing on people working and investing."

Economists generally say there is little Congress or Bush can do in the short term to affect energy consumption that market forces are not already doing.

"In the short term, you're pretty much stuck with the price of oil and gas as it is," said Ian Parry, senior fellow at Resources for the Future, a non-partisan Washington think tank. "Over the longer term you can take steps to try to reduce your dependence on oil by promoting higher fuel economy, … but there is a very limited scope in the short run."

Energy demand is highly "inelastic" over the short term, he said, meaning that consumers respond only slightly to price changes. Over the longer term of three to five years, however, consumers do respond, changing their behavior by driving less or buying more fuel-efficient cars.

Congress could encourage conservation by raising taxes on gasoline, he said, in effect offsetting "the adverse side effects cost to society of driving," including time lost to traffic congestion, wear and tear on roads, and the health burden of air pollution.

Kurt Van Dender, an economist at the University of California at Irvine, said that at current gas prices increased taxes might not be needed to reduce consumption.

In any case, "Americans would probably lynch the politician who first breathed the idea" of a higher gas tax, said Taylor of Cato. "And rightly so, in my opinion."

He agreed that higher taxes would be the most efficient way to reduce energy consumption. But he questioned how the government would presume to know the proper level of energy consumption and suggested that market forces would do a better job of encouraging conservation and developing new energy technologies.