High Gas Prices Fueling State Policy Delusions

S tate-level politicians are facing an emergency: High gas prices in an election year. It’s not the kind of emergency where people’s lives are on the line, like the pandemic. It’s the kind of emergency where politicians’ jobs are on the line.

The high prices aren’t their fault, and there’s not much they can do about them, but that doesn’t mean they aren’t going to try. One of the ideas being floated in many states is a gas-tax holiday. It’s a classic case of wanting to be seen as Doing Something about a problem instead of making a sensible policy decision.

The logic goes like this: If states suspend their gas taxes, they can directly reduce the price of gas and save residents money. For example, if a state has an average gas price of $4.25 per gallon, and it has a 25-cent gas tax, suspending the tax reduces the price of gas to $4.00 per gallon.

Right away, it’s easy to see that the results are pretty underwhelming. Gas at $4.00 per gallon is still expensive compared to last year’s prices.

But the gas tax isn’t only paid by consumers, so gas stations wouldn’t just automatically reduce prices by the amount of the tax. Economists like to debate the incidence of the gas tax, i.e., what portion of it is paid by producers and what portion is paid by consumers, and much ink has been spilled on the question when gas-tax holidays were proposed in the past. In the long run, that’s an interesting question, but for a short-term holiday, it really doesn’t matter all that much because the amount of the tax relief is so small.

Forbes ran the numbers for three states that already passed gas-tax holidays. Based on average miles driven, average fuel efficiency, and the level of the state’s gas tax, Connecticut’s three-month gas-tax holiday will save the average driver — drum roll, please — $34. And that’s in a best-case scenario where all the tax relief goes to consumers. Using the same methodology, Georgia’s two-and-a-half-month gas-tax holiday will save drivers $23, and Maryland’s 30-day holiday will save $14. Arguing over tax incidence for amounts that low isn’t even worth it.

Usually, government policies have concentrated benefits and dispersed costs, but gas-tax holidays don’t even have concentrated benefits. In exchange for those paltry sums to drivers, states are blowing holes in their transportation budgets. Every month the gas tax goes uncollected costs Maryland $100 million, for example.

Maryland house speaker Adrienne Jones went to another level of delusion by saying that the gas-tax suspension is “part of a larger, unified global response to help deter Russia’s growing aggression.” No offense to Speaker Jones, but nobody in the Kremlin ran to Putin, shouting, “Turn the tanks around! Maryland suspended its gas tax!”

As usual when discussing dysfunctional state-level politics, California takes the cake. Governor Gavin Newsom wants $9 billion in tax refunds in the form of $400 per car (up to two cars) for every California car owner. Yes, that includes electric-car owners who don’t pay for gas in the first place. On top of that, he wants to send $750 million to transit agencies so they can provide free transit for three months and pause the sales tax on diesel. Plus, he wants to put off a scheduled increase in the gas tax that’s supposed to take effect this year.

Aside from the massive price tag, well beyond what any other state wants, Newsom’s plan would add inflationary pressure. It would amount to yet another helicopter drop of money, similar to the stimulus payments from the federal government over the past two years. The rebates aren’t targeted to need or proportional to gas use. And if the plan passes, Californians aren’t expected to even receive the money until July at the earliest.

Because of increased tax revenues and a boatload of (unneeded) federal money, states are awash in cash, and they’re spending like politicians (drunken sailors don’t spend other people’s money). Given that situation, it’s tempting to think states can afford the gas-relief efforts. But every dollar spent on these gas initiatives is a dollar that could be spent on something more worthwhile. States should see their fiscal breathing room as an opportunity to make long-lasting tax reform instead of blowing it on election-year goodies.

In a few years, when states are weeping and gnashing their teeth about how they don’t have money to fix potholes or pay pensions, remember how they used their surpluses in 2021 and 2022.