Raise the gas tax!

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With voters hammered by high inflation, politicians everywhere are looking to play the hero. Greedy capitalists are easy targets for outraged rhetoric, but hot air rarely powers a tangible policy change. 

Motor fuel and natural gas prices are within reach of policymakers, however. President Joe Biden ordered the release of an average of 1 million barrels of oil per day from the Strategic Petroleum Reserve for the next six months (after releasing 50 million barrels in November).

In New York, Gov. Kathy Hochul is doing her part: The just-passed state budget includes a suspension of the state sales tax on fuel, the motor fuel use tax and the metropolitan commuter transportation district sales tax. Local governments are empowered to suspend their share of the sales tax on motor fuel when prices top $4 per gallon. State Sen. James Skoufis has proposed a four-year moratorium on utility prices and, in time-honored fashion, has promised an investigation into alleged “price gouging.” 

Such announcements may move the political needle, but the impact of the SPR release on prices will be quite modest. Total U.S. oil consumption in pre-COVID 2019 was 20.5 million barrels per day (before falling 13 percent in 2020). The million-barrel-per-day release isn’t nothing, to be sure. The spot market for West Texas Intermediate crude oil dropped from $108 per barrel on March 30—the day before the announcement—to $99 on April 1, making for a nice news cycle for Biden. Yet the price has continued to bounce around since, hitting $108 again on April 18.

Unlike natural gas, whose prices are more regional, oil prices move globally. And global consumption is about 100 million barrels per day. The SPR release is more than a drop in the barrel, but not much.

Hochul’s estimated $585 million tax cut to consumers has no impact on the supply of crude, however, thus won’t lower the market price. In fact, by driving down the price at the pump for New Yorkers by 16 cents per gallon (combining the 8-cent excise tax and 8-cent sales tax), more gasoline will be consumed than would have been the case without the gas tax suspension. So, the price paid by New Yorkers will be cheaper, but probably not 16 cents-per-gallon cheaper. Out-of-state drivers could pay more. Producers and retailers pocket a bit of the difference by subtly failing to pass along the full discount. 

As there seems to be no credible plan to reduce state spending by half a billion dollars, taxpayers will have to make up the difference in other ways. 

County Executive Adam Bello and the Monroe County Legislature are under pressure to suspend the local tax on fuel prices over $4 per gallon. Gas Buddy reports the average price in the Rochester area is about $4.25. While the impact on county tax revenue would be modest, the shortfall would still have to be made up by taxpayers.

Skoufis’ efforts to hold down natural gas prices are also fraught—while the state can use the powers of the Public Service Commission to manage prices, the state’s power to influence the underlying cost of natural gas is very limited in the short run. (The state’s power to control long-term supply is considerable, but that’s another column.)

Populism and economics are often at odds. Voters can be shortsighted, preferring a sugar high today over solid policy tomorrow. They can also be misinformed by charismatic leaders with a different agenda (or who are misinformed themselves).

Let high prices do their work

Free markets are effective because they allow prices to telegraph scarcity. The Roman poet Juvenal, writing around 100 BC, noted that the public was easily won over by free wheat and entertainment—“bread and circuses.” Juvenal’s cynical observation is formal policy in many nations—25 million Egyptians have qualified for up to five loaves of flatbread per day at a price of a U.S. penny each. A market-responsive price would encourage consumers to shift to other grains when wheat prices soar. Now enshrined as a right, the government risks civil unrest if it changes policy in light of the Russia-Ukraine war.

Want to fight climate change? Leave prices high.

The war has also disrupted supplies of petroleum products. Higher prices encourage conservation and a shift to alternative fuels. That’s a good thing. 

Pre-COVID gasoline prices were near historic lows, when adjusted for inflation. The return on investment in alternative fuels was also lower as a consequence and sales of fuel-hungry vehicles grew. 

Most economists support the use of tax policy to encourage specific behaviors. Along with most members of my tribe, I have long supported the imposition of a carbon tax, for example.

Raise the tax as prices fall

Raising taxes is never popular. But why don’t we add a tax that rises as prices fall? Adding a carbon tax when gas prices are low—say, when it was around $2.50 per gallon in 2019—would be more difficult than adding a tax prospectively that would increase as prices fall. 

The combined state sales tax and fuel use tax on gasoline is currently set at a fixed 16 cents per gallon—and has been at that level since 1996. At some point, the retail price of motor fuel will fall again. Sensible, long-term policy would increase the tax as the price comes back down. Suppose the tax rate remains at 16 cents until the average retail price falls below $3.50 per gallon then rises by 0.5 cents for every 1 cent drop, reaching 32 cents per gallon—twice the current rate—when the average retail price hits $3.18 per gallon. And if the price never falls, the rate change never takes effect.

PLEASE restructure the tax!

There’s more to be done. A fixed “cents per gallon” tax makes little sense when the revenue is aimed at paying for the cost of transportation infrastructure, where prices are continually increasing. The tax should be changed to a percentage that will adjust over time.

Moreover, as electric vehicles take over an increasing share of the market, a “motor fuel tax” becomes an anachronistic way to pay for the wear and tear vehicles impose on our infrastructure. Electric vehicle owners should pay their fair share. An annual tax based on vehicle miles driven is far-better suited to the times.

Kent Gardner is Rochester Beacon opinion editor and chief economist at the Center for Governmental Research. The Beacon welcomes comments from readers who adhere to our comment policy including use of their full, real name.

4 thoughts on “Raise the gas tax!

  1. Raising the gas tax according to the miles a vehicle is driven is too simplistic and hurts those least able to bear the additional cost of a higher tax. A significant number of the people driving a high number of miles are making long commutes because there is no work closer to their residence, or al least no work that pays what they can make at the end of the long commute. I commute 60 miles each way from Yates County to Rochester because I can’t find work in my profession in Yates County that pays as much as I can make in Rochester, even after factoring in the cost of gas. Conversely, I can’t afford property in Monroe County that offers the benefits of my Yates County property, not to mention my much lower property taxes. Most electric cars are out of my price range and don’t offer the range I need to commute to and from work and run errands. In addition, not everyone has the option of just buying a smaller, more fuel-efficient car. A truck may be a necessity if one is working outside he home and also maintaining a farm, or at least hauling hay and feed for the two horses and other small livestock I own. Gas prices may respond to economic forces, but the impact on real people who make up the economy should also always be part of the equation.

  2. We’re clearly going to need, eventually, to either be willing to forgo the revenue or solve the problem of how to raise the funds from electric, out-of-state, and commercial vehicles, so really, it’s mostly a question of whether the time is right. A couple more thoughts: (1) As we transition from gas to electric vehicles, we’re going to run into the fairness issue of people with money owning electric vehicles, and people without money (and renters) owning inefficient gas vehicles. The solution needs to accommodate this issue, which honestly, is the most compelling argument to me for finding a way to keep the tax from becoming effectively regressive. (2) The emissions argument appeals to one set of people, the argument for continuing to fund transportation infrastructure from a dedicated source rather than taking it from otherwise-committed general funds appeals to another set, and making the funding a fair process that is easy to understand and execute appeals to another set — and we need to think through the extent to which any of these goals may create opposition rather than support, if not carefully handled.

  3. Good comments, Kelvin. Thanks for raising these points.
    1. I’d prefer a move to a % gas tax, instead of a fixed cents/gallon figure. While we shouldn’t index everything, resistance to tax increases either leads to steadily rising deficits and/or peculiar spending decisions. The sales tax is a pretty good tax, as taxes go, as its distortionary impact on spending is modest and responds to inevitable inflation without the Kabuki theater we see around the debt ceiling.
    2. If the “cents per gallon” denomination persists, I’d NOT reverse the direction after prices begin to rise again. I’m looking for a way to restore a sensible “user fee” approach to funding transportation infrastructure that is modestly responsive to changing costs.
    3. The mileage-data issue is easily handled in NYS–don’t know about Pennsylvania–as we have an annual inspection requirement. I know that “vehicle miles driven” is recorded on my annual inspection form. This could easily be incorporated into a statewide database and reflected on our tax returns.
    4. A major challenge arising from my suggestion is the need to replace the considerable revenue earned from commercial and out-of-state vehicles. I ran across an old study performed by my employer (Cntr for Governmental Research) back in the 1980s that assessed the share of NYS Thruway tolls were being paid by out-of-state travelers. Question posed was: Should Thruway tolls be eliminated as construction bonds are retired (as promised during planning)? Study concluded that continuing to fund the Thruway through tolls was a way of reducing the construction and maintenance burden on NYS residents.

  4. While I agree that it’s worth reconsidering how we charge users for road construction and maintenance, I’m less than convinced of the options presented, many of which seem at cross-purposes. You didn’t take much space to flesh them all out, but the suggestion to raise taxes as gas prices fall and reduce them when prices rise seems incompatible with changing the tax based on the cost of infrastructure.

    And while paying by the mile seems good in theory, as it eliminates the free rider issue for electric vehicles, how will it be implemented in practice? Will we have to add a statement of mileage to our income tax returns? What about those who don’t pay income tax? How will statements be verified (tied to annual inspections, perhaps)? The current gas tax is pretty efficiently administered through the business tax system; billing every driver directly is much more of a logistical challenge. It also eliminates the tax incentive to drive more efficient cars, which you earlier mentioned as a good thing. Perhaps a tax based on gross vehicle weight, which is strongly correlated with wear and tear on roads (and with low gas mileage), would be a good companion, though a tax that’s not based on usage raises its own complications for people who have vehicles they use infrequently.

    We need to think carefully about what the purpose(s) of the tax(es) are, and realize we probably can’t solve all the problems at once.

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