Half-Baked Gasoline Tax Reduction Idea

In previous commentaries, I have explained that suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have explained why it is dangerous and foolish to reduce or suspend fuel taxes when gasoline or diesel prices rise in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees, Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, Suspending a State Gasoline Tax Sticks It to the Dealers, and Fuel Tax Reductions and Suspensions: Negative Impacts Even Wider Than Previously Discussed. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Now a candidate for governor of Pennsylvania, Bill McSwain, has promised to permanently cut the state’s gasoline tax by 50 percent. Two of the first questions that popped into my head, and that hopefully pop into the heads of every Pennsylvanian past the age of ten, is this: Does this mean cutting in half funding for the repair and maintenance of state highways, bridges, and tunnels? Does it mean eliminating the payment of state fuel tax revenue to the state police to fund police protection for towns whose residents are unwilling to pay for those services and prefer that the state’s motorists do so?

Cutting funding for road repair and maintenance in half is foolish, for all the reasons I have explained in previous commentaries. If you think there are too may potholes in Pennsylvania now, wait until funds for fixing them get axed. Perhaps McSwain has some plan to cut funding for some other important state service, because he claims he would be cutting, not raising, taxes. Nothing in his has press release explains how he would deal with the issue. According to this report, he did hint that he would make up the revenue shortfall by using American Rescue Plan money. Whether that is possible is debatable, and even if it were possible, what happens when the finite amount of ARP money is exhausted? Would kicking the can down the road simply create substantially higher taxes in the future that causes no concern for a present-day politician who thinks only in the moment?

On the other hand, cutting funding for police protection provided to an ever-growing list of towns whose residents want others to pay for their protection makes sense. Of course, a candidate for governor would risk losing tens of thousands, or more, votes if this plan were to be revealed before an election. And, of course, it would mean that these localities would need to raise taxes, which would leave people in those towns paying as much, if not more, taxes than they were paying before the reduction in state liquid fuel taxes. Not that such an outcome is a bad thing, because the residents of these towns ought not be getting free police protection at the expense of motorists throughout the state, but surely these folks ought to know the price they would be paying if they latch onto a promise of reduced fuel taxes.

Promises to cut taxes should be accompanied by explanations of collateral consequences. What spending will be cut? What other taxes or fees will be imposed? Of course, the “cutting taxes raises revenues through economic growth,” the classic and failed supply-side “trickle down” nonsense has failed time and again, and doesn’t even mesh well with the cutting of a tax such as the liquid fuel tax. Pothole-filled roads, collapsing bridges, and defective traffic lights are the exact opposite of what a growing economy needs.

When something is too good to be true, such as the joy of gasoline taxes being halved, there always is a catch. Whether it’s the free weekend at a resort, the free installation of some home improvement, or some other free item, there is some offsetting disadvantage. Sometimes it’s hidden in the fine print. Some times it isn’t even disclosed. Will Bill McSwain share the catch in his promise?

Fuel Tax Reductions and Suspensions: Negative Impacts Even Wider Than Previously Discussed

I’ve yet to read or see or hear anything that causes me to change my position that suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have explained why it is dangerous and foolish to reduce or suspend fuel taxes when gasoline or diesel prices rise in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees, Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People, and Suspending a State Gasoline Tax Sticks It to the Dealers. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Reader Morris has again happened upon another story offering yet another reason why suspending or reducing gasoline taxes has consequences that are overlooked even though they perhaps should be anticipated. This time, he alerted me to this story, that explains how suspending New York State’s fuel taxes would cost the New York City Metropolitan Transportation Authority as much as $400 million in funding if the taxes were suspended for a year. Perhaps I, too, failed to consider this sort of impact from reducing or suspending fuel taxes, because part of Pennsylvania’s fuel taxes is used to fund the state police. I addressed that issue in So Who Should Pay Taxes for Police Protection?, but did not consider what happens to state police funding if fuel tax revenue shrinks or dries up.

When asked about alternative sources of funding if the New York State gasoline tax is suspended, the chairperson of the MTA acknowledged that there were no other sources of which he was aware. I don’t think anyone has asked the Pennsylvania State Police what that department would do if Pennsylvania fuel taxes were suspended or reduced, but I suspect that the outcome very well would be continuation of its funding while the cuts would be made in the other activity supported by the tax, namely, repair and maintenance of roads and bridges. Of course, if that happens, the same people complaining about increases in the cost of gasoline and diesel, which are not caused by increases in the tax, most likely will be the same people complaining about increased deterioration in the state’s highways and bridges.

Dealing with the impact of significantly increased fuel taxes requires complex analysis. Most legislators do not have the sort of education and experience in economics, tax policy, engineering, corporate finance, and similar disciplines to craft solutions that work both long-term and without disadvantageous collateral consequences. Instead, they rely on lobbyists from various sectors, each of whom is advocating for a solution beneficial to their interests rather than the best interests of the general community. Similarly, lobbyists and campaign contributors steer legislators away from examining particular ingredients of inflation, such as business profits rising at rates far exceeding the rate at which the cost of products and services sold by businesses. To that disarray is added the misinformation spread by those who want the complaint spotlight to shine elsewhere, misinformation that causes substantial numbers of Americans to think that the President somehow caused gasoline prices to increase, and who do not give any attention to the fact gasoline prices have increase worldwide. That, of course, brings us back to the world of ignorance, and provides even yet another example of how ignorance is the most dangerous affliction for a species that calls itself sapiens sapiens.

When considering a decision, decision makers need to ask, “What happens if we do this?” The immediate impact is almost always easy to see. It’s the secondary effects, the collateral consequences, and the unintended and often harmful outcomes that get overlooked. The price paid for failing to “think it through,” a technique I continuously encourage law students to make part of their analytical toolbox, can be much more than a few dollars at a fuel pump. One way of doing this is to bounce ideas off other people, which is why I appreciate reader Morris having pointed out to me a collateral consequence, namely, the impact on other activities funded by fuel taxes, that I had previously analyzed but had not put into my list of reasons why reducing or suspending fuel taxes in reaction to market price fluctuations is a dangerous and foolish idea.

Suspending a State Gasoline Tax Sticks It to the Dealers

Over the years I have explained why suspending liquid fuel taxes in an effort to compensate for market fluctuations is a bad idea. I have done so in posts such as Potholes: Poster Children for Why Tax Increases Save Money, When Tax Cuts Matter More Than Pothole Repair, Funding Pothole Repairs With Spending Cuts? Really?, Battle Over Highway Infrastructure Taxation Heats Up in Alabama, When Tax and User Fee Increases Cost Less Than Tax Cuts and Tax Freezes, Road Taxes and User Fees as a Form of Pothole Insurance , and Death as a Price for Taxes and User Fees, and Suspending the Federal Gasoline Tax Won’t Blunt Inflation And Will Harm Some People. Though the focus generally was on the federal gasoline tax, the same arguments apply to state taxes on gasoline and diesel fuel.

Thanks to reader Morris, who directed me to this story, it turns out that suspending the gasoline tax can have unintended disadvantageous consequences for fuel dealers. Understanding the problem requires a bit of background. Though in some instances fuel taxes are paid by customers at the pump and then remitted by the dealer to the appropriate jurisdiction, in Connecticut the fuel tax is paid by the dealer when they get a delivery of fuel from the wholesaler, who then remits the tax to Connecticut. So when the state announced a tax “holiday” the customers expected prices to drop immediately by the amount of the tax. If dealers do that, they are selling the gasoline for less than what they paid because they are unable to recoup the tax that they have already paid to Connecticut through the wholesaler. Dealers who delay reducing the price of gasoline until they have sold the gasoline on which they have already paid the tax are then accused of price gouging. The Attorney General of Connecticut is threatening to fine the dealers for not immediately reducing prices by the amount of the tax. It’s not a small matter, as estimates suggest about $3.5 million in taxes have been paid by dealers on fuel sitting in their storage tanks waiting to be sold to customers. In the meantime, the governor announced that people probably will need to wait for “days” before seeing the benefit of the tax holiday.

Statements from the Connecticut Attorney General suggest to me that he does not understand cost accounting. He claimed, “You cannot in any way shape or form levy the 25 cent-per-gallon tax. You can’t back-date it, you can’t forward-date it and you can’t hedge your inventory.” In other words, he is telling the dealers, “You paid the tax, we are giving a tax holiday to your customers, so you can’t collect the tax from them.” What does this do? It causes the dealers to lose money when they sell the gasoline in their storage tanks. The Attorney General also claimed that “gas stations retailers were trying to make money from the gas tax holiday,” and asked the public to report any dealer who did not drop prices by the 25-cent-per-gallon tax. He doesn’t seem to understand that attempting to avoid losing money because of a sunk cost is not price gouging. Considering that gasoline dealers make a profit of a few pennies per gallon, not being able to recoup a 25-cent-per-gallon tax already paid will put dealers into dire financial straits, perhaps put some into bankruptcy, and possibly lead to enough station closures to create panic buying and shortages.

Dealers are asking the state to refund the roughly $3.5 million paid on gasoline sitting in storage tanks waiting to be sold. That would eliminate the losses faced by the dealers if they sell the gasoline after reducing the per-gallon price by 25 cents. Though some legislators agreed, the proposal was not enacted. According to the dealers, when a similar situation arose in Maryland, the state issued credits as a way of offsetting the already-paid tax.

There now is another reason to add to the list of reasons gasoline tax reductions, suspensions, and “holidays” are unwise ideas. These grandstanding gimmicks cause delays in road, bridge, and tunnel maintenance and repair, in turn generating more accidents, property damage, personal injuries, and deaths when vehicles hit potholes or other unrepaired structural elements. They encourage increased demand, which in turn increases prices. And they put dealers in Connecticut, and perhaps other states, into financial distress.

Too often, legislators fail to “think it all the way through” when they rush to enact attention-grabbing, vote-collecting gimmicks. The short-term benefits end up being wiped out, and then some, by the long-term damage.