Cut the Gas Tax? No, No, No.

There’s an understandable groundswell of support for suspending gasoline taxes. High prices at the pump are causing pain for Americans, and most states are in good financial condition, so they can afford to give something back to the people. Strategas Securities, an investment research firm, counts 22 states that are considering some sort of full or partial suspension of gasoline taxes. There are also proposals to suspend the federal excise tax on gasoline.

But there are better ways to help people squeezed by inflation than suspending gas taxes. California and New Jersey are on the right track: They’re looking at sending checks to state residents that can be used as people wish. For heavy drivers, the checks would help cover gasoline, which is up 38 percent in the 12 months through February. For others the money might be more useful for, say, college tuition (up 2 percent), rent (up 5 percent), milk (up 11 percent) or meat (up 14 percent).

Gavin Newsom, the governor of California, is proposing to delay a scheduled increase in the state gas tax and combine that with sending checks to state residents. Democrats in the State Assembly on Thursday proposed $400 as the amount for each taxpayer, whether he or she buys gas or not. “The exact amount and who gets it we’re still hashing out,” Erin Mellon, Newsom’s communications director, told me.

Why not just cut the gas tax? For one thing, it’s hard to justify insulating people from an increase in the price of one particular product when there are so many other things that people also need to spend money on.

Even if you, a state legislator, are in the mood for cutting one product’s cost to consumers, gasoline is one of the worst choices you could make. Not as bad a choice as cigarettes, to be sure, but still bad. Burning gasoline causes pollution locally (carbon monoxide, nitrogen oxides, particulates) and contributes to global warming (through greenhouse gases). And driving contributes to time-wasting congestion as well as accidents.

Also, in most states, gas taxes help finance road construction and repair. That’s sensible: People who use the roads the most pay the most to support them. Suspending the gas tax would break that link. More of the money for construction and repairs would have to come out of the general fund, which everyone pays into.

I spoke with Severin Borenstein, an energy economist at the Haas School of Business at the University of California, Berkeley. He calculates that even in California, which has some of the highest taxes and fees on gasoline in the nation, those charges still aren’t enough to cover all the damage that gas-powered cars do. He says, bravely, that gas taxes should be higher, not lower. (Electric vehicles, which don’t incur gas taxes, are another story. They cause less pollution but similar amounts of congestion and accidents.)

One drawback of gas taxes is that they hit the lower middle class hard. Working people who need to drive a lot and can’t afford an electric vehicle pay a bigger share of their incomes on gas taxes and fees than the rich, especially if the rich own Teslas. So cutting gas taxes looks at first like striking a blow for equality.

On the other hand, the very poorest Americans actually don’t spend a lot of money on gasoline because they don’t tend to have cars. And if striking a blow for equality is what you want, a check from the general fund is a great way to do it. Borenstein suggests limiting the checks to families earning below, say, $100,000 a year. New Jersey is looking at a family income ceiling of $250,000 a year.

One other big advantage that writing checks has over suspending the gas tax: When the government sends a check, all of the money goes to consumers. If instead it cuts a tax, some of the money goes to the producers (gas stations, oil companies) because the retail price doesn’t fall as much as the tax does.

The political motivation for suspending the gas tax is strong, says Daniel Clifton, head of policy research at Strategas, because high gas prices aren’t good for incumbent officeholders. One indication that politics are coming into play is that Florida’s Republican-controlled Senate is proposing a fuel tax holiday for the month of October, right before elections. Lawmakers say that’s because October is a light month for tourism and they want the benefits to go to residents. OK, but that’s a long time to wait for help, and judging from the futures market, gas prices are likely to be considerably lower by then.

Today’s inflation is caused by a combination of supply shortages, such as those caused by the war in Ukraine, and strong demand, which was fueled by emergency pandemic aid and job growth. To the degree that strong demand is a culprit, it doesn’t make sense for states to pump a whole lot more money into consumers’ pockets because doing so will simply contribute to more inflation.

So those state checks shouldn’t be too big. States that have big budget surpluses should use some of the money to replenish their rainy-day funds, catch up on contributions to public pension funds and invest in infrastructure, Jared Walczak, vice president of state projects at the Tax Foundation, wrote last year.

The readers write

Regarding your Monday newsletter: President Vladimir Putin of Russia appears to have very strategic goals: the Black Sea ports; Ukraine’s armaments industries (e.g., Antonov in Kyiv, vital for long-distance, heavy-load aircraft needs); military facilities; mineral wealth, e.g., lithium; restoration of the Russian language and customs to the eastern enclaves; prevention of NATO encroachment into Ukraine; and even some of the holiest sites of the Russian Orthodox Christian religion.

This does not appear to be an impulsive invasion. However, many projects are not completed if the costs of completion become so high they are unaffordable. This is the question. Does Russia have the resources to complete the project? If not, it will end at some percentage completion. If yes, then nothing will stop it until it is completed.

Leon Joffe

Pretoria, South Africa

Quote of the day

“Equilibrium itself has rarely been observed in real life — market prices have a notorious habit of fluctuating.”

— George Soros, “The Alchemy of Finance: Reading the Mind of theMarket” (1987)

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