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.