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Suspending the Gas Tax Isn't the Right Response
Lawmakers in both Maryland and Georgia have officially suspended the state gas tax in an effort to help drivers over the coming weeks. These two states join other countries, like France, Japan, and the United Kingdom, that have reduced their gas taxes for the same reasons. Politicians appear to be scrambling to offer a policy response that addresses rising inflation and increasing gas taxes, but some have appeared to choose a politically popular policy rather than addressing a more serious underlying issue. While recent gas prices are some of the highest Americans have seen in recent years, they aren’t the highest in real terms. Over the past two weeks, the national average price for a gallon of gas has fallen by about 8 cents.
This policy change won’t have the full impact that drivers will likely expect. For starters, the overall financial impact is relatively small. For Maryland drivers with a 12-gallon tank, the tax relief would amount to about $4.32 per tank if the entire tax was actually removed from the price drivers pay. If drivers filled up weekly, they may save about $17 over the month that the tax is suspended. The impact is relatively small on a personal level, but the impact on state budgets could be more significant. Suspending fuel taxes for a month could reduce Maryland’s Transportation Trust Fund by about $94 million. The more interesting application, for now, will be the subtitle of a recent Washington Post article:
Station owners were “urged to pass on 36-cent-per-gallon savings” to drivers, but there was no guarantee that would happen. Gasoline taxes had been levied on station owners, and they are the ones responsible for tracking and remitting those payments to the government. The pump price represents “the buyer’s price,” which includes the amount the sellers receive and the various taxes that have been applied. Removing the state’s gas tax does not mean that prices will necessarily fall by the entire 36 cents. The amount prices fall will depend on the relative elasticities of buyers and sellers. In this case, the price elasticity measures how responsive buyers and sellers are to price changes.
Buyers are often much less responsive to changes in gas prices than station owners. At least in the short term, drivers don’t have a lot of alternatives to driving and can’t easily change how many miles they have to drive. This makes drivers relatively inelastic, which means they bear a heavier burden of gas taxes. Reducing the gas tax means that they should also receive most (but not necessarily all) of the reduction. Let’s look at some data to see if we can measure the size of that dip!
GasBuddy tracks average daily prices across states and various metro areas. The chart below shows average retail prices for the past month in Maryland and two neighboring states: Virginia and Delaware. The gas tax relief bill was passed on March 18th, and average prices are about $4.09 per gallon. Prices appear to have bottomed out 4 days later on March 22nd at $3.78 per gallon. The two neighboring states fell by relatively little over the same time period, suggesting that Maryland gas station owners passed about 31 cents per gallon to the drivers and kept about 5 cents for themselves.
While gas station owners have had the gas tax levied on them, the true measure of a tax burden is based on the tax incidence. This is a measure of how buyers and sellers split the tax between them. The change seen in the chart above is consistent with the notion that drivers have much more inelastic demand than station owners do, but that the demand is not perfectly inelastic. Once taxes are reinstated, prices would likely increase, but they shouldn’t increase by the full 36 cents.
Beyond how much of the tax is actually passed down to consumers, there’s an inequality issue that should be considered as well. If the policy goal was intended to help drivers, particularly low-income drivers, this policy seems poorly targeted in two ways. First, low-income drivers are least likely to drive or carpool. The data hasn’t been updated for the most recent National Household Travel Survey, but only about 79% of low-income workers rely on cars while 84% of high-income workers are driving or carpooling. In addition, low-income drivers tend to drive fewer miles per trip on average compared to high-income drivers. The gas tax relief likely benefits high-income families much more than low-income families. Here’s a look at the breakdown of trip modes by income levels from the 2009 National Household Travel Survey:
The second issue with the gas tax relief is that the actual impact (about $5 per tank on average) is fairly negligible. A more targeted program could have provided income subsidies directly to low-income households or cut income tax rates for certain low-income tax brackets. Energy and fuel prices make up a relatively small share of most Americans’ budgets compared to other items that have also seen major inflationary changes as well, like rent and food. A gas tax is a very visible political move while direct payments or income tax relief would only be seen by relatively few people. Everyone needs to eat and a place to sleep, but not everyone owns a car or even uses it regularly enough to benefit from a temporary gas tax holiday.
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Drivers filling up in Maryland used to pay 36.1¢ in taxes for each gallon of gasoline purchased [State of Maryland]
The federal gasoline tax is 18.4¢ per gallon [US Energy Information Administration]
The average price last week for gasoline in the Netherlands was equivalent to $9.78 per gallon [Global Petrol Prices]
An average vehicle trip was 5.8 miles for the lowest income group (below $5,000) and rose to over 10 miles when household annual income surpassed $50,000 [National Household Travel Survey]
Food-at-home prices are predicted to increase between 3% and 4% in 2022 [US Department of Agriculture]
Average rental listings increased 14% from last year [The Washington Post]