Tax holidays, even for gasoline, are bad public policy
Many states stage what they call “tax holidays” in which they temporarily stop collecting a certain tax – usually a sales tax – and pass on the “savings” to residents.
Very rarely do tax holidays deliver much in the way of savings to people. Most often they simply buy things they were already going to purchase a bit earlier – pulling consumption forward.
But what about proposed tax holidays on gasoline? With fuel prices rising, doesn’t it make sense to give folks a little help at the pump, even if it’s just a little bit, and for a limited time?
According to the Tax Foundation, the answer is a firm “no,” and it uses a recent Florida gas tax holiday as an example:
In Florida and elsewhere, a gas tax holiday may be good politics, but it is unlikely to achieve its aims. Fuel prices are high for many reasons right now: general inflation, higher transportation costs, the isolation of Russian markets, and more. Actual fuel shortages, as experienced in the 1970s, have yet to materialize, but high prices are one of the reasons for that. Prices are high mostly due to rising costs, but high prices also have the effect of limiting consumption. If a state suspends its gas tax, some of that reduction may find its way to consumers in the form of lower prices at the pump, but even in a highly competitive market, the equilibrium price may well be higher than the tax-free price. Just because Florida (or some other state) spends $200 million on gas tax relief doesn’t mean that consumers will pay $200 million less on gasoline.
With scarcity rearing its head and inflation soaring, moreover, now is not a great time to artificially inflate demand.
In other words, suspending the tax might not do anything…particularly if gas prices, even without the state tax, keep rising.
That’s not stopping other states from seriously considering the idea:
Florida is the first out of the gate, but it may not be the last. Lawmakers in California, Georgia, Illinois, Massachusetts, Maine, Michigan, Minnesota, New York, and Tennessee have championed suspensions, and the list is growing longer as the Russian invasion of Ukraine puts further pressure on already skyrocketing prices at the pump.
“Further pressure” is the operative phrase here. And just as important as rising prices is how rapidly the underlying commodity – oil – can fall. In a single day recently, oil prices dropped 12 percent, all on the hopes of peace talks that would end Putin’s invasion of Ukraine.
The key, then, to easing pain at the pump – besides greater domestic production, of course – is peace. Not a holiday.