A friend of mine who works for a medical software company has a problem, and one that he shares with much of America these days - it's costing him $75 per week for enough gasoline to commute to work.

Of course, the rising price of gasoline just doesn't impact people who work at technology companies -- it impacts pretty much everyone. But, more and more, politicians, pundits, and everyday Americans are relying on technology to produce alternative energy sources that will reduce our reliance on oil, if not Middle East oil.

In the meantime, politicians are debating whether a short-term suspension of the federal tax is a good idea. I want to touch on that today, and then follow up on any progress the technology industry is making on alternative energy sources.

Exhibit “A” on that discussion this week is the volleying between Hillary Clinton and Barack Obama over a temporary federal gas tax holiday this summer. GOP presidential nominee John McCain and Clinton both support such a holiday, touting it as a way to give beleaguered consumers a few more bucks in their pockets this summer. “Nonsense” says Barack Obama, who’s dug his heels into the political turf against the 18.4-cent-per-gallon federal gasoline tax, calling it a “gimmick” out on the campaign trail. Obama seems to have the bigger megaphone and, so far, the upper hand on the issue, primarily because he has just about every media pundit and economist on his side during this debate.

We’ll get to the key economic issues in a moment, but politically, both Clinton and Obama want to have it both ways (good or bad, McCain can usually be counted on to cut taxes on any front). Historically, Hillary has reacted to tax cuts like a vampire to wolf bane. She’s already promised that, as president, she would call for a windfall profits tax on oil companies. She’s also on the record as telling Americans that she’ll “take your money away for the common good”. Consequently, her call for suspending the federal gas tax reeks of political opportunism, at best, and outright vote-buying, at worst.

Obama fares no better. Taking a page out of Sen. John Kerry’s playbook, as a state senator in Illinois eight years ago, he actually voted for a gasoline tax suspension before he came out against it. In fact, Obama voted three times in favor of a statewide initiative to suspend gasoline taxes. Obama votes helped trigger Illinois’ gas tax holiday in June of 2000, when Illinois motorists were up-in-arms that gasoline prices had hit $2 a gallon in Chicago. The gas holiday cut the state’s 5% sales tax on gasoline for six months. At the time, Obama was virtually crowing about his role in the gas tax suspension, joking to senate colleagues that he would post signs on gas pumps in his district that said, "Senator Obama reduced your gasoline prices." Not so today. Obama is adamant that the gas tax suspension won’t work, and will in fact raise prices at the pump, as oil companies and gas station owners will simply raise gasoline prices by the same amount of the gas tax cut.

Thus, the debate begs an economic question. Does a gasoline tax suspension work – or not? And, is there any proof either way?

Actually, there is, and it comes right back to the Illinois gas tax holiday in 200, and a similar moratorium about the same time in neighboring Indiana. Economic date from the “Illinois experiment” shows that the price of gasoline at the pumps declined by three percent in the aftermath of the suspension, while prices climbed four percent after the moratorium was lifted. Economically, that roughs out to a 70% pass-through rate, according to the only scientific study done on the pass-through of the tax holiday savings to Illinois and Indiana consumers. The study, entitled "$2.00 Gas! Studying the Effects of a Gas Tax Moratorium," by Joseph J. Doyle Jr. and Krislert Samphantharak, concluded that the tax moratorium, by and large, was a benefit to consumers, albeit a marginal one. Download the PDF here http://econpapers.repec.org/paper/nbrnberwo/12266.htm or here http://papers.ssrn.com/sol3/papers.c...ract_id=905523.

Critics of the gas tax holiday say that a short-term suspension of gasoline taxes encourages driving and gas consumption at a time when they say Americans should be weaning themselves off of foreign oil, leading to more oil consumption and higher prices down the highway. Critics also say the increase in driving that will result from the gasoline tax suspension will harm the environment, and that the missing tax revenues will lead to a decline in road, bridge and highway maintenance across the U.S.

Proponents don’t see it that way. They say commuters are getting pummeled at the pump, with rising fuel prices chipping away at their incomes. They say that real people – car-pooling moms, workers with long commutes, truck drivers, and local communities saddled with rising gas prices for police, fire, ambulance, and school bus vehicles – deserve a break.

George Frost, a tax attorney based in Berkeley, Calif., points out that while any financial gain for consumers after the suspension of a gas tax would be modest, it’s better than the status quo – and it wouldn’t lead to more consumption or a reduction in highway maintenance. The economic basis for attacks on the Clinton tax holiday is a fundamental economic theory called "tax incidence", he writes in an article entitled “Obama is Wrong About the Gas Tax” on Salon.com last week.

“It says that the cost of a tax on any consumer product will be borne by those with lesser "elasticity" in the tug of war between suppliers and consumers. "Tax incidence" falls mostly upon the group that responds least to price -- the group that has the more inelastic price-quantity curve. In this instance, assuming that the supply of gas is pretty much fixed, it means consumers will end up paying those missing tax dollars directly to the gas companies in the form of higher prices. The increased demand triggered by the price cut will supposedly lead drivers to bid up the price of gas, swallowing the tax cut.”

Frost points to the gas tax experiments in Illinois and Indiana eight years ago as the only evidence available – either way – that such a tax holiday actually works out to the benefit of consumers.

“Gasoline inventories are currently very high, and these surpluses can absorb much of any increase in demand. Should gasoline consumption surge still higher, in the short run, refiners can also divert enough of the crude oil meant for other products -- diesel or jet fuel, for example -- into gasoline to meet demand. On the demand side, let's face it: This is a tiny price cut. It is not likely to spur demand much beyond the usual seasonal increase in driving. And if oil companies do what Obama says they will do -- jack up prices to cover the tax -- there would be no incentive at all to drive more.”

As Frost and many other pundits suggest, the most viable long-term approach to energy reform in the U.S. lies in better fuel efficiency standards and an upgrade into alternative energy sources. The U.S., which supplies 60% of its own gas and oil needs, could also benefit from increased oil drilling in Alaska and off the east and west coasts. A recent U.S. Geological Survey, along with a report from the North Dakota Petroleum Council, say that between 175 to 500 billion barrels of recoverable oil lie under a 200,000 square mile area under North Dakota. Known as the “Bakken Formation”, the area could yield enough oil to significantly reduce the U.S. dependency on foreign oil.

But until that day comes, if ever, we’re left with economic eggheads and pandering politicians argue whether giving consumers more money in their pockets this summer is a good idea. Somewhere out there today is a truck driver, a mom dropping her kids off at school on the way to work, or even my friend commuting to his workplace - all wondering that, at $3.75 a gallon, if a gas tax holiday isn’t worth a shot.

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