Gas Tax Follies

In California, the governor has proposed a bewildering solution to help fix the massive budget shortfall for the state. One of the issues that constantly plagues budgeting in California is that much of the state’s spending is fixed by voter approved initiatives, meaning that officials have very little flexibility to shift money between priorities or adjust overall spending. But, as always, there’s tricks. (from: The Sacramento Bee via The Source)

The proposal in question is to eliminate the 6% state sales tax on gasoline and replace it with a 10.8 cent increase in the per gallon excise tax. Past voter initiatives have locked in parts of the sales tax revenue to go to schools, local government, and mass transit. But there are no such restrictions on the excise tax, so it would release that money to be used elsewhere. Line item voter approved spending formulas like the one for the gas tax have a long and contentious history in California and few argue that they are an effective way to handle tax collection and spending. I can forgive the administration for wanting to free themselves from complex rules like this in order to deal with what is truly a huge problem with the state’s budget. But here is where I am really left scratching my head. According to the proposal’s projections, the net result will be a $.06 reduction in gas prices. So part of the Governor’s proposal to close a nearly $20 billion gap in the budget is to cut taxes. Interesting.

Now, there are some valid arguments for this. First is that cutting any taxes tends to stimulate the economy, helping businesses and individuals, creating jobs, etc. Gas tax cuts are also fairly progressive as they tend to benefit lower income people more than higher income people whose gas purchases represent a much smaller part of their income. So there is some potential for benefit here. But let’s be honest. Today’s average regular gas price in California is $3.051. So $.06 is a 2% decrease. “Stop those layoffs, our fuel costs just went down 2%!”

Here’s some more problems with this approach. First, gas prices are increasing and widely expected to increase much more as the economy recovers. The new formula locks in a set dollar amount tax instead of a percentage. This means the state won’t collect more as fuel prices rise missing out on a natural revenue source as the economy grows. Most economists are predicting high inflation in coming years which will also rapidly reduce the value of a set tax price. Furthermore, it means that to raise gas taxes in the future becomes a legislative issue. How many politicians will have the will to propose raising gas taxes as inflation and market changes slowly reduce to the value of the excise tax to zero.

Next, let’s talk about the “progressive” nature of this tax cut. In the short term, lower income people do benefit more than higher income, assuming that everyone drives. What about the large population of people who don’t? The change would mean a roughly $1 billion loss of bus and rail funds. I’m speculating that the resulting service cuts that will result might impact people more than a 2% decrease in gas prices.

Finally, how about long term goals? I won’t even get into the logic of reducing money for education, but California is spending huge amounts of money to expand rail service and add more carpool lanes. The state is leading the drive to improve fuel efficiency standards and reduce the levels of pollution and GHG emissions. So to balance that, apparently we are going to incentivize driving, reduce the service levels of public transit, and increase the budget deficit at a time when the state is looking at record shortfalls.

Let’s be honest, despite their environmental concerns or belief in building strong communities, middle class voters hate high gas prices. The only real logic I see here is bureaucrats, frightened that they will be blamed for draconian service cuts, hoping to balance it with a popular cut in gas prices.  If they think $.06 is going to do it…good luck with that.

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