The global run-up in oil prices that started even before Russia’s invasion of Ukraine has politicians scrambling to argue for cuts to the gasoline tax.
One bloc calling for cuts is Democratic senators up for re-election in 2022. I don’t begrudge anyone their right to posture for re-election. And honestly, I’m not even against a gas tax holiday if it would actually help them. But when I see Gavin Newsom and the California state legislature talking about a gas tax rebate, I do want to note that this is a very poor policy remedy for the problem.
The best way to think about what’s wrong with it is to start with the fact that one way we could reduce oil prices would be to halt all sanctions on Russia. It’s not just that the recently enacted ban on importing Russian oil raises prices; even the financial and economic sanctions that don’t directly target the energy sector impede Russia’s ability to produce and distribute oil. Of course, the reason not to lift all the sanctions is that we want to be sanctioning Russia!
By the same token, we shouldn’t respond to the downsides of sanction-induced increases in oil prices by subsidizing oil consumption. That winds up feeding back into Putin’s treasury. Even if the U.S. and its allies don’t directly import any Russian oil, the volume of non-Russian oil that the U.S. consumes still impacts the price that China and India pay Russia. The good news is that state governments are flush thanks to the American Rescue Plan, and interest rates on federal debt remain very low despite inflation, so the U.S. has the fiscal flexibility to spend money or forego revenue in order to cope with the economic impact of the war.
But California and other states looking to use tax policy to reduce the cost of living should do so without subsidizing oil consumption by taking advantage of the fact that gasoline is not the only thing they tax.
Cut the sales tax instead
While gasoline taxes are regressive, 45 states (which together account for more than 90 percent of the U.S. population) derive a large share of their revenue from an also-regressive retail sales tax.
To an extent, reasonable people can disagree about the merits of this kind of distributionally regressive taxes. My general view is that if your revenue is financing useful services, then it’s wise not to worry too much about the distributive impact of the revenue base because an effective public sector and a robust social safety net are inherently good for poor people.
But however you look at this, the gas tax is superior to the retail sales tax. They are both regressive, but the very poorest people tend not to drive (cars are expensive) and are stuck relying on America’s mostly terrible system of public transit buses. And of course, gasoline causes especially high levels of pollution.
My preference would be for virtually every state to raise gas taxes in order to reduce their sales tax. So if they want to respond to cost-of-living worries with a tax cut, I think states should move to cut the sales tax. Since the people who drive cars also buy things that aren’t gasoline, it helps them. But it also helps non-drivers and encourages people to respond to the shortages by driving less when possible.
The federal government does not collect sales tax. But it could, on a temporary basis, exempt the first $X of wages from payroll taxes (perhaps combined with a temporary Social Security bonus payout). That would put extra money in people’s pockets to help cover the cost of gasoline while also allowing them to react to pain at the pump by simply buying less gasoline and using the money for other purposes.