Opinion: Gas prices are falling. Can we stop the nonsense talk of a tax holiday?
A new study shows states do not benefit from tax holidays. They increase demand, while the problem today is a lack of supply.
Maybe now we will stop hearing nonsense about the need for a gas tax holiday.
Earlier this week, AAA reported that gasoline prices had fallen below $4 a gallon in much of the land (not in Utah, however, where they were $4.65 on average as of Friday, according to AAA). This is still far above the nationwide average price a year ago, which was $3.19, and it’s miles away from the $1.15 a gallon recorded in Salina, Utah, at the dawn of the pandemic on April 23, 2020.
Remember that? Probably not, because you were stuck at home, with nowhere to drive as the economy shut down.
Gas prices could be a ride at Disneyland, comparable to the old Tower of Terror. But the terror isn’t necessarily confined to the prices themselves.
If you hold political office, the urge to resist prudence can be overwhelming. Almost everyone who votes drives, and despite the well-meaning efforts of many policymakers, almost everyone who drives still has a gas-powered car. When the price goes high, politicians feel a compelling need to do something — even, apparently, if that something does more harm than good.
And so, gas tax holidays — periods of time during which state gas taxes are suspended — have become popular.
As prices reached their apex earlier this year, talk circulated about even enacting a federal gas tax holiday. For once, Washington’s dysfunction came in handy. But even some in the Utah Legislature began talking about suspending taxes for a season.
Now, we can hope that talk will disappear, at least for a while.
A new report from the Tax Foundation in Washington shows why this would have been a bad idea, and why the states that enacted these through the years — whether for gas or any other targeted purchases (school supplies, for instance) — have not benefited.
“Sales tax holidays introduce unjustifiable government distortions into the economy without providing any significant boost to the economy,” the report said. “They represent a real cost for businesses without providing substantial benefits. They are also an inefficient means of helping low-income consumers and an ineffective means of providing savings to consumers.”
The problem, of course, is that this doesn’t fit on a bumper sticker. And if it did, few would understand it. “Pay less for a gallon of gas,” on the other hand, resonates with almost everyone.
Politicians will argue that tax holidays stimulate economic growth. People will buy more of a thing that costs less. But the current economy, nutty though it may be, isn’t suffering from a lack of demand. A series of bottlenecks, from failures in supply chains to OPEC’s reluctance to increase production to limits on drilling in the United States, have limited supply.
A tax holiday on gas, then, could actually raise prices by stimulating demand even further.
The most obvious problem, of course, is that tax holidays rob governments of taxes they were counting on for various programs. In the case of gas taxes, they mean less for road maintenance and construction.
The study found that some jurisdictions — the District of Columbia, North Carolina and Georgia — have discontinued using tax holidays because they found them too costly. It said, “... experience shows that the claims of economic stimulus, increased revenue, and consumer savings are greatly exaggerated.”
Far better for governments, including Congress and the White House, to focus on increasing the supply of gasoline, or to enact long-term tax reforms that give businesses the assurances they need to invest in productive capacity. They won’t do this as a result of temporary tax gimmicks.
The study says 17 states plan to hold tax holidays in 2022, whether for clothing sales, school supplies, computer sales or energy costs.
That’s two less than in 2010, the height of the craze.
The price of gas will likely always be prime for political “do-something-ism” because it tends to be used as an argument to vote for or against a candidate. In reality, it is subject to a variety of factors that today includes the unwillingness of oil companies and oil-producing nations to increase supply, the war in Ukraine and the international market. Right now, a slowing economy seems to be reducing demand, which is contributing to the drop.
Gas tends to be cheap when we need it the least, and most expensive when we need it most.
Politics rarely pivots on nuanced explanations or studies from economists, especially in election years.
That’s why Utahns, and all Americans, should be glad that declining prices will keep gas tax holidays off the agenda, at least for now.