Economist: Gas Tax Holiday Doesn’t Make Sense

Gov. Jim Justice recently declared that the idea of a gas tax holiday in West Virginia was “dead on arrival.” He said he would not ask the legislature to consider it even though several other states have passed them or considered it.

West Virginia University professor and economist Heather Stephens recently published an article on why she didn’t think gas tax holidays were a good idea. She spoke with News Director Eric Douglas to explain the reasoning.

This interview has been lightly edited for clarity. 

Douglas: What is a gas tax holiday? 

Courtesy photo

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Courtesy Photo

Stephens: If the state wanted to suspend all or part of the current gas tax in West Virginia, they have the legal right to do so, just like lawmakers and the governor can change other taxes in the state. A holiday suggests it’s temporary, right? That it’s not forever, it’s not a tax cut. Temporary tax relief. And that’s what it would be.

Part of the problem right now is that we have high gas prices, everyone sees that they’ve gone up even more in the last month. But there’s also no indication that they’re going down anytime soon. So if we were in a situation where temporarily gas prices were going to be very high, and the state said, “Okay, during this short term hike, we want to give a little bit of relief,” the budgetary implications wouldn’t be so severe. But if the prices are going to stay high, then there’s going to be ongoing pressure once you temporarily cut them to keep them cut. And gas taxes are a major source of infrastructure funding.

A report that came out last year found that West Virginia was 50th in the quality and state of our infrastructure. So to me, thinking about cutting something that brings in needed revenue for something we need to invest in in the state doesn’t make a whole lot of sense.

Douglas: What are the disincentives for doing it? 

Stephens: Other than losing this money that generally goes toward infrastructure, the disincentive of a gas tax holiday is that we want people to make decisions in the long run, right? So, if gasoline prices are high, those who can afford it are going to drive less, people who have access to public transit will drive less, people who have enough money can also be thinking about switching out their vehicles to more fuel efficient vehicles – a hybrid or an electric vehicle where you don’t even have to worry about the gasoline prices.

Part of the reason you would never want to cut taxes permanently on gasoline or arbitrarily make the price look cheaper than it really is, is that it takes away this incentive to make adjustments that account for the fact that price is higher. This can have really positive benefits in terms of air quality. If there’s people driving more fuel efficient vehicles, we have less pollution since cars and trucks are one of the major sources of air pollution in terms of addressing climate change.

Douglas: One of the things you and your co-author suggested in the blog post that you wrote was that a gas tax holiday gives equal financial benefit to everybody, but it’s not the same financial benefit to everybody.

Stephens: If we gave out a gas tax holiday, the gas price is still going to be above $4 a gallon. Higher income people are going to be better equipped to say I want to keep paying $4 a gallon. If higher income people don’t switch up their vehicle, the proportion of gasoline as part of their budget is much smaller. Higher income people are better equipped to absorb the higher gasoline taxes into their current budget without making a change.

The research that we did a few years ago shows that as a percentage of your income, people at lower income levels are disproportionately burdened by increasing gasoline prices. We are all paying this higher price, and you may not have access to public transportation as an alternative. So people without public transportation access, people that live in more rural areas and people in lower income levels, tend to bear the burden of higher gasoline prices.

If we really are concerned about working people who have long commutes and don’t have access to other ways to get where they need to go, there are better ways to address that without a gas tax holiday.

Douglas: A number of states have considered sending out $100 gas cards to everybody, so maybe that’s a better way to handle it. But we should aim for lower income people as well – not everybody who’s a driver? 

Stephens: Our paper suggests that if you want to avoid affecting the demand for gasoline itself, but want to help people who are most hit, a tax credit or literally a check, like what was done during the coronavirus [pandemic] based on income, is a much cleaner way to address this burden and doesn’t affect people’s driving patterns as much.

One of my colleagues who co-authored a piece with one of her colleagues has also looked at using some of the gas tax revenues to help people below a certain income level purchase more fuel efficient hybrid or electric cars, rather than the sort of tax credits that have been available in the past for that which are just available to anyone. All of those kinds of things could help the people who are the hardest hit by the higher gasoline prices, while making people who can afford it, continue to pay it.

And the other thing we found in our paper, which I think is really important, is that if you only target the relief to people below a certain income level, you use a portion of your gas taxes. And so the rest of the gas taxes are still available for infrastructure versus with a holiday.

Douglas: What is causing the cost of gas to keep increasing?

Stephens: There’s two basic things that are very simple. One is, obviously, the war with Russia. Russia is a major world supplier of oil, which is refined into gasoline. And it’s basically cut off from most of the world market. So basic economics would say, supply goes down, your prices are gonna go up.

The other thing that’s happened is that as the world is opening up, people are kind of finally starting to move around more after two years of COVID-19, the demand for gasoline is up quite a bit as well. I teach my students, supply goes down, prices go up. So you have two factors that are both kind of pushing prices up. And then there’s some reluctance in the oil and gas industry to start doing a whole bunch of new drilling because of two things that have happened in the last 15 years. One, you had the shale boom which then led prices to plummet. And then just two years ago, gasoline futures were at negative prices. So the industry is being a little cautious about how quickly it ramps up.

And I’m actually concerned that labor shortages will actually make it so that even if they try to ramp up, they won’t have the workers to do it. All of those things are keeping prices high. China’s starting to open up. Right now, China’s demand has actually been down.

That’s why there’s not a lot of people that think prices are going down anytime soon.