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May 07, 2008

Some States Considering Gas Tax Holidays

Two weeks ago I wrote that a federal gas tax holiday wouldn't help consumers much because at least half of the benefit would go to sellers. I called it a pander and a waste of time, and I suggested that if we really wanted to help consumers by reducing high prices at the pump, the quickest way would be for states to have a gas tax holiday:

One avenue that should be explored is cutting state gasoline taxes. Of course, this would require action in the state legislatures, and then McCain couldn't hold himself out as some kind of hero of the people. State and local gas taxes are typically larger than the federal tax. More importantly, state gas taxes overwhelmingly increase the price for consumers more than they do for sellers.

A state gas tax holiday would work better than a federal gas tax holiday because it is much easier for gas companies to avoid high-tax, high-regulation states than it is to avoid federal taxes and regulation. That makes the supply much more elastic at the state level than at the federal level.

The last time we talked about this, I was challenged in the comments that an 18.4 cent decrease in gas taxes would result in an 18.4 cent decrease in the price at the pump. That's not the case because taxes are shared between consumers and sellers in proportion to the elasticities of supply and demand for the product. I estimated that at the federal level, about half the tax is paid for by consumers and half by suppliers. And now, I have numbers to back that up (PDF). The study also supports my contention that state gas tax holidays are where we can find a greater benefit for consumers.

Now, I'm pleased to see that states are considering gas tax holidays, including Florida, Missouri, New York, and Texas. When you get right down to it, the average savings will only be between $10 and $80 (depending on state) for the average consumer over the summer, but at least the state legislation has a chance of actually achieving what it's aimed at, especially in high-tax, high-regulation states: substantially lowering the price at the pump.

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posted by Gabriel Malor at 01:26 PM

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