Gas tax holiday wouldn’t benefit drivers, analysts say. Here’s why.

ORLANDO, Fla. — As Russia’s invasion of Ukraine and inflation push gas prices to historic levels, a growing number of states are joining an effort to give drivers a small, but seemingly simple source of relief: suspending their state gas taxes.

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Whether it’s the 18 cent federal tax, Pennsylvania’s 58 cent surcharge or Georgia’s 18 cent fee, lawmakers across both political parties are clamoring to put the unpopular policy to sleep.

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“18 cents off the price of a gallon will indeed help,” GA Senator Raphael Warnock (D) told reporters in Atlanta.

Florida has gone down this route before. Late last year, Gov. Ron DeSantis (R) proposed suspending the state’s gas tax for a few months as he looked over a budget awash with cash from unexpectedly high revenues and American Rescue Plan dollars.

“Over a billion dollars in gas tax relief for Florida families,” he marveled. “That’s going to make a big, big difference. The average family over a five- or six-month period, you know, can save up to $200.”

DeSantis’ proposal failed as other lawmakers questioned the effectiveness of it: half of the tax is paid for by visitors, who would also benefit from a suspension.

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On Wednesday, DeSantis’ rival, State Agriculture Commissioner Nikki Fried (D) needled him for not immediately joining other states’ push.

“The Florida Legislature and Ron DeSantis could reduce the price of gas by 27.3 cents a gallon right now,” she said.

Tax policy analysts say it’s a good thing they aren’t.

The problematic proposal

A gas tax holiday is a near-perfect political pitch: temporarily eliminate a tax no one likes, bring down the price of a necessary item and claim success for helping your voters.

However, analysts across the political spectrum are united in their opposition to the proposal, calling it an ineffective policy.

“If you’ve ever driven around, you’ve noticed the gas costs different at different gas stations. This is because ultimately, the person selling you the gas gets to set the price,” Richard Auxier, Senior Policy Associate at the nonpartisan Tax Policy Center said. “There is no law or reason that the people selling the gas have to lower their prices by 27 cents.”

The nonpartisan Tax Foundation’s Jared Walczak agreed with him.

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“You would see some sort of reduction, you wouldn’t see a 27 cent reduction. And certainly it wouldn’t last,” Walczak explained. “This is just a relatively inefficient way to provide tax relief to individuals right now.”

Walczak said the gas tax added up to a fraction of the overall price consumers pay. Most of it, he said, is due to supply and demand. The market in turn sets a price that drives enough consumer demand to maximize sales, but not enough to cause long lines at pumps.

Reducing the cost of gasoline would be temporary because states would be running against those market forces. As the price drops, demand picks up – driving the price back to or even past its original level, along with increasing the inflation rate.

He blamed the federal government for providing too much aid to states during the COVID pandemic, which he said was driving market trends as states tried to spend cash before officials attempted to claw it back.

“This isn’t a time to further goose the economy, this is a time to make sure that supply and demand actually are an equilibrium,” he said.

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There are other problems with the proposal besides its ineffectiveness. Chief among them: the reason DeSantis suffered a rare defeat at the turn of the year. If the state were to fund road and bridge projects with another revenue source, fewer tourist dollars would be involved. Turning to stimulus money pulls funding away from another need.

“It’s very easy to say, ‘Oh, don’t worry, if there’s no cost to this, we’re just going to take that money from somewhere else,’” Auxier said. “That somewhere else is always coming from something that possibly very important.”

Alternative plans

Gas prices are still a problem, both analysts admitted. They pinch consumers, including lower-income drivers who often have to commute longer distances.

Both men challenged lawmakers to come up with a better, albeit less politically exciting plan that would ensure 100% of the benefit goes to drivers, as intended.

“When you do something like a one-time tax rebate or an earned income tax credit, you’re going to get 100% of the benefit of the state tax policy,” Auxier said.

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Walczak practically echoed him.

“These [tax holiday proposals] are all miss diagnosing the problem,” he said, calling for both long- and short-term solutions. “A gas tax really isn’t a particularly efficient or equitable way of accomplishing the purpose.”

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