Increasing gasoline prices have spurred federal lawmakers to propose policies designed to help consumers at the pump. One such proposal that has garnered considerable attention is a "gas tax holiday." Unfortunately, this proposal would do little for consumers because it would be unlikely to lower the price of gas. The proposal would entail suspending the 18.4-cent-per-gallon federal tax on gasoline for the summer. Not only has the proposal received wide media attention, it has been universally panned by experts of all ideological stripes (including Motor Trend magazine). At the heart of the criticism is the likelihood that the tax break would mostly serve to inflate the profits of oil and gas companies, and consumers would enjoy little benefit. The basic economic principles described below explain why the benefits of a sales tax break do not wholly accrue to consumers.

The willingness and ability of producers (suppliers) to sell a given amount of gasoline at a given price is known simply as the "supply of gasoline." To maximize profits, gas producers will supply the market with larger quantities of gas as the price of gas increases. For example, when the price of gasoline is $4 per gallon, suppliers will maximize profits by supplying to the market 1 million gallons; when the price of gas is $3.50 per gallon, profits are maximized when 900,000 gallons are sold.

The behavior of the consumer (buyer) is described by the quantity of gas he or she is willing to purchase at each price, and typically this quantity decreases as prices increase. This behavior is known as "demand." And rather than profit maximization, consumers are driven by utility maximization. (Utility is simply the value, or usefulness, that a consumer gains from consuming goods.) When suppliers and buyers meet in the marketplace and exchange goods for dollars, a price will be determined.

When the government becomes a participant in the market — when it imposes a tax on goods — the response of market participants can be described in terms of either a change in demand or a change in supply. To the consumer, it appears that suppliers are supplying smaller quantities of gas at each price (i.e., supply is reduced). To the supplier, it appears that buyers are willing and able to purchase smaller quantities of gas at each price (i.e., demand is reduced). Described either way, the result is an increase in price and a decrease in the quantity of gas sold on the market.

But who would benefit if the gas tax is sent on a "holiday"? If suppliers pay the tax, their profits will increase during a gas tax holiday. If buyers pay the tax, then their ability to purchase other goods is enhanced if the gas tax is temporarily repealed. And, the proportion that each pays, the incidence, is determined by how responsive each is to changes in price. If the consumer is relatively more responsive to changes in prices (i.e., when prices increase, the decrease in his or her quantity consumed is greater than the increase in quantity supplied), then the producer pays the greater share of the tax and will benefit more than the consumer from a repeal. Vice versa for the consumer.

A suspension of a sales tax, then, mostly benefits the market participant that is less responsive to changes in prices. So, some portion of the tax on gas will go toward higher profits for gasoline suppliers, and the rest will go to the pockets of consumers. As it turns out, according to one study, the gas tax incidence falls almost equally on buyers and suppliers of gas in the United States. If we assume that $9 billion would have been collected in federal gasoline taxes over the summer, then a temporary suspension of the gas tax would have at least four results:

• The Highway Trust Fund would see nine billion fewer dollars
• Gasoline producers (Exxon, Chevron, etc.) would see their profits increase by $4.5 billion
• Motorists would save $4.5 billion — about $40 per driver over the summer
• Motorists would be willing and able to drive more, consuming more gas, spending more time on the road, creating more pollution — and possibly not saving even the $40 per driver over the summer.

A crucial caveat to these numbers, however, is the nature of the short-term supply of gasoline. Decisions of how much gas to produce are made months in advance, and changing production quantities over a three-month period is a costly endeavor that may not even be possible to undertake at this point. This implies that during the summer driving season, a time span for which production decisions have already been made, the ability of producers to change the quantity of gasoline supplied is severely impaired, making suppliers considerably less responsive to changes in gas prices. The upshot is that the vast majority of a "gas tax holiday" tax cut — nine billion dollars — would go toward increasing gas suppliers' profits.

Most major oil companies have been making historic profits in recent years. The largest company, ExxonMobil, reported profits for the most recent quarter of $10.9 billion, the second-largest quarterly profit in U.S. history. This quarter is not an anomaly. Just the quarter before, ExxonMobil reported the largest-ever quarterly profit for a U.S. company at $11.66 billion.

A suspension of the federal gas tax would ultimately inflate the profits of the most profitable companies of the world while providing miniscule relief to consumers. And as motorists would see marginally cheaper gas, they would drive more miles on the bridges and roads that depend on a trust fund deprived of $9 billion in revenues for repairs.