Clinton-McCain gas tax holiday slammed as bad idea

By Alister Bull

WASHINGTON (Reuters) - A gas tax holiday proposed by U.S. presidential hopefuls John McCain and Hillary Clinton is viewed as a bad idea by many economists and has drawn unexpected support for Clinton rival Barack Obama, who also is opposed.

"Score one for Obama," wrote Greg Mankiw, a former chairman of President George W. Bush's Council of Economic Advisers. "In light of the side effects associated with driving ... gasoline taxes should be higher than they are, not lower."

Republican McCain and Democrat Clinton, who is battling Obama for their party's nomination, both want to suspend the 18.4-cents-per-gallon federal gas tax during the peak summer driving months to ease the pain of soaring gas prices. The tax is used to fund the Highway Trust Fund that builds and maintains roads and bridges.

Economists said that since refineries cannot increase their supply of gasoline in the space of a few summer months, lower prices will just boost demand and the benefits will flow to oil companies, not consumers.

"You are just going to push up the price of gas by almost the size of the tax cut," said Eric Toder, a senior fellow at the Urban-Brookings Tax Policy Center in Washington.

Obama criticized the plan as pure politics and said the only way to lower the price of gas is to use less oil.

"It would last for three months and it would save you on average half a tank of gas, $25 to $30. That's what Senator Clinton and Senator McCain are proposing to deal with the gas crisis," he said on Tuesday in Winston-Salem, North Carolina.

"This isn't an idea designed to get you through the summer, it's an idea designed to get them through an election."

This stance has prompted Clinton to accuse him of being out of touch with ordinary Americans as she campaigns ahead of key presidential nomination contests in North Carolina and Indiana on May 6.

CLINTON AT THE PUMP

The New York senator was commuting to work in South Bend, Indiana, on Wednesday and planned to pump gas at a gas station to draw attention to her plan to suspend the gas tax on consumers and businesses.

"We will pay for it by imposing a windfall profits tax on the big oil companies," she said on Tuesday. "They sure can afford it. This is a big difference in this race. My opponent opposes giving consumers a break from the gas tax but I believe the American people are being squeezed pretty hard."

The cost of a gallon of gasoline has touched $4 in some parts of the country as oil prices nudge toward a record $120 per barrel, hammering drivers at a time when higher food prices and falling home values are already crimping U.S. consumers.

Many economists implicitly agreed with Obama and said the McCain-Clinton gas tax plan sent the wrong signal on energy efficiency and was at odds with their pledges to combat climate change by encouraging lower U.S. carbon emissions.

"I think it is a very bad idea," said Gilbert Metclaf, a economics professor at Tufts University currently working with the National Bureau of Economic Research.

"If we want people to invest in energy-saving cars, we need some assurance that the higher price paid for these cars is going to pay off through fuel savings," he said. "It is a very short-sighted, counterproductive proposal."

Economists also saw it is a poor way of getting money to the households that need it most and warned that it might end up in the cash tills of the oil companies.

"If you want to provide households tax relief, a direct rebate ... is more effective. Not all of the tax relief from a gas tax holiday will be passed on to consumers. Some will likely be kept by refiners," Mankiw said in an e-mail response.

New York Times columnist Paul Krugman was similarly underwhelmed: "It's Econ 101: the tax cut really goes to the oil companies," he wrote on his blog on Tuesday.

(Additional reporting by Jeff Mason in Winston-Salem, N.C., and Ellen Wulfhorst in Indianapolis)

(Editing by Bill Trott)