Gas Tax Holidays: "Popular, but Bad"
Despite the political popularity of gas tax holidays, there are downsides and consumers are unlikely to reap the full benefit.
Last week our focus was on rising natural gas prices and residential utility bills, now we turn to a different energy issue: motor fuel taxes. Amid surplus revenue for states, a push for tax rebates, and the increasing price of oil — focus has shifted attention to gas tax holidays.
Gas tax holidays are not new. Nearly 15 years ago, in 2008, there was another push for gas tax breaks. From 2000 to 2008 four states enacted gas tax holidays: Florida, Georgia, Illinois and Indiana. And, according to the New York Times, “retailers did not pass on all of the intended savings.”
In theory the incidence of a consumption tax is irrelevant. Even if the “holiday” reduces cost to consumers, demand increases and may still result in higher prices. During Florida’s 2004 gas tax suspension people hoarded gasoline, driving up demand and prices.
Whether a gas tax holiday is good or bad policy is debatable. However, due to economic forces at work, drivers save less than politicians suggest. The loss of motor fuel tax revenues can sometime give more money back to suppliers and distributors, and may divert money away from transit and transportation projects if not backfilled. Just recently, the New York Metropolitan Transportation Authority Chief said they could lose $100 million from a gas tax holiday … and that state officials had assured any lost revenue would be matched with other state funds.
This week, we’re taking a look at gas tax holidays.
States With Gas Tax Holidays
Connecticut Gas tax holiday starts Friday; when will you see a change? News 8
Where States Are Considering Holidays
Is a Gas Tax Holiday on the Agenda in Albany? New York Times
Gas Tax Holidays at the State Level Investopedia
At the federal level, Pelosi rejects gas tax holiday The Hill
Not Everyone Wants a Holiday
CHART OF THE WEEK
Over the past decade states have reformed transportation related revenues to make-up for declining motor fuel tax revenues. In Connecticut, for example, the state has redirected a portion of the motor vehicle sales and use tax to its transportation fund. According to the state:
In FY 2021, Motor Fuels Tax revenue was 26.5 percent of the total revenue deposited in the Special Transportation Fund, down from 45.0 percent in FY 2010. The Sales and Use Tax has overtaken the Motor Fuels Tax to become the largest single revenue component in the Special Transportation Fund; in FY 2021 it represented 26.9 percent of total collections.
It has long been assumed that motor fuels consumption would decline as consumer behavior changes — either due to price increases or increased use of alternative power technologies. Since FY 2015, Connecticut has added new revenue sources to its Special Transportation Fund in order to account for this anticipated deficit in demand and “reliance on a single slow-growing revenue source.”
Despite the expected overall decline in motor fuel tax revenues, they still make up a significant portion of transportation funds nationwide. In Kansas, transportation revenues became a subsidy for its general fund: “The state has been transferring money from the State Highway Fund to the State General Fund every year since FY 2014 to subsidize the state’s general operations.”
As states increase hybrid and electric vehicle requirements, motor fuel tax revenues will further decline. States are already exploring alternative highway user taxes and other revenues to address the projected shortfalls. One new idea is charging drivers a penny or two for each mile behind the wheel or a vehicle miles traveled (VMT) tax . Oregon and Utah launched the first programs and several other states are running pilots to test technology and build public support.
Fuel Tax Incidence and Supply Conditions NBER Pubs
The Issue: If there is a gas tax holiday, who benefits?
Results suggest that the benefits of fuel tax holidays are likely to accrue to consumers during under normal market conditions, but are likely to be shared by consumers and producers during times at which supply chain constraints exist.
Consumers are unlikely to reap the full benefit of fuel tax moratoria.
Any opinions expressed herein are those of the author and the author alone.