There is a man filling up his motorcycle at a gas station in New York. The state of New York is suspending its gasoline tax for the rest of the year. New York has some of the most expensive gas in the country. The photo was taken by Spencer Platt.
Many of our political leaders have a view of how gasoline prices are set. They want oil companies to add up all of their costs and make a profit. Sometimes the oil companies will sell gasoline for less than $2 a gallon. Sometimes, the belief is that they are greedy and will sell it for a high price.
The taxes are added to all of the costs. The government gets a cut of each gallon of gasoline sold. The federal gasoline tax has been 18 cents a gallon. The price of gasoline is determined by the costs, profit margin, and taxes you add up. So the belief continues.
The idea of a gas tax holiday has been proposed by some politicians. This idea is being considered by the president.
The problem with such a scheme is that the taxes help fund the country's transportation infrastructure. If the money stops coming in, there will be either a cut to those programs or more deficit spending.
There is a bigger issue. According to the idea floated above, gasoline isn't priced. The price of gasoline is determined in the market. The profit margin floats up and down with the price because it is based on supply and demand. It explains why oil company profit margins are so volatile.
If gas taxes were slashed, what would happen? If you think that gasoline is priced based on supply and demand, cutting gas taxes doesn't do anything to address supply or increase demand. You can easily see that gasoline prices are going back to where they were before the tax cut. The 18 cents that is currently captured by the federal government would just move somewhere else. It would increase the profits of the retailers, refiners, and oil producers.
Don't misunderstand me. Lower taxes are something I like. It is just that a commodity like gasoline that operates on supply and demand isn't going to respond to a gasoline tax cut.
New York suspended its motor fuel tax of 8 cents a gallon and its 4 percent sales tax up to $2 a gallon on June 1st. The average retail price of gas in New York was $4.93 a gallon on June 1st. The average price in New York was $5.06 a gallon two weeks after the tax holiday ended. Consumers there haven't seen a drop in gasoline prices despite the tax cut because of the underlying price of oil.
What might work if gas taxes aren't cut? There has been a suggestion of rebate cards. If the rebate cards aren't specific to gasoline, that may work. It is the same dynamic if they are. It doesn't address the issue of supply.
If, instead of a gas card, consumers received a card that could be used anywhere, then that would have the intended effect. There is still an incentive to consume less because gasoline prices are high. It would be possible for consumers to make up for the loss of discretionary income by getting money from the government.
There are at least two possible problems with that scheme. This could be seen as subsidizing oil company profits. Increased profits up and down the oil supply chain is where most of the increase in oil prices has gone. That is because oil prices are high and not because oil companies suddenly decided to make more money. It will be difficult to sell windfall profits taxes to the public.
Over the past few years, we've seen a number of similar payments, which are similar to the one we're talking about today. These payments contribute to inflation because they aren't the main driver. People spend more money when they have more money. That causes inflation to go up.
There are no easy financial tricks for reducing the price of gas. It is possible that the release of oil from the reserve will help. It will be possible for consumers to cut back on high prices. Growing production from U.S. producers will be helpful.
As we head into the fall and winter, all of these factors will help lower gasoline prices. Don't expect a gas tax holiday. It won't work as expected.
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