The Gas Tax Holiday: Can the States Do Any Better?
While TaxVox and others have disclosed the folly of a federal tax holiday, some have suggested that temporary state gas tax relief might work better. Some
According to an article by Doyle and Samphantharak published in the Journal of Public Economics, between 60 and 70 percent of the 5% gasoline sales tax cut was passed on to consumers, while 80-100 percent of the reinstatement of the tax was passed on– albeit at a time when prices had already dropped. (The original spike in prices was caused by temporary limits on supply.) Thus, it appears that drivers got some, but not all, of the benefits but paid for the tax reinstatement. They also found somewhat smaller pass-through effects near the state borders. An earlier study released in 2001 by Michael Martin of the
What did it all mean for tax revenues at a time when, like today, states are facing budget shortfalls? The
Despite this less-then-stellar windfall for drivers, the Illinois and Indiana tax changes probably passed along more savings than a current state holiday would because the temporary nature of the supply constraints in the Midwest market at the time might not apply today either there or in other states. Any new pressure on prices caused by the increase in demand from specific state tax cuts would be spread across regional gasoline supplies, causing prices to fall in the state with the tax holiday and rise in neighboring states. In contrast, with national refineries running at or close to capacity, a nationwide tax cut would not bring forth additional supplies, so state holidays are more effective at reducing gas prices within a state than a federal moratorium would be in reducing national gas prices.
Bottom line: The states’ tax holiday didn’t do much more for consumers than the fed’s would. If motorists want to save money on gas, they’d be a lot better off driving less, or slowing down.