Gasoline tax breaks are a low-octane boost for motorists

Fuel tax cuts are becoming increasingly popular. Mileage will vary, but they will likely disappoint.

With petrol prices near all-time highs, both the UK and Germany announced tax cuts last week. In the US, Maryland, Connecticut and Georgia are temporarily cutting state taxes. Others could follow: Ohio, West Virginia and New York are among the states considering such measures.

Fuel tax cuts are flowing through to motorists, albeit not fully. A 2006 study by Profs. Joseph Doyle of the Massachusetts Institute of Technology and Krislert Samphantharak of the University of California, San Diego, on a gasoline tax moratorium in Indiana and Illinois in 2000, found that consumers experienced a price drop of about 70% of the tax cut. But here are two more losses to consider: First, 30% of that benefit goes to the gasoline suppliers — an odd beneficiary at a time when some U.S. lawmakers are seeking indictments with no evidence that the oil and gas industry is price gouging. Second, cuts in fuel taxes — particularly in the US — often come at the expense of funding road and transportation infrastructure. The US already has one of the lowest fuel tax rates among developed countries.

Whether the tax cuts result in lower pump prices depends in part on the size of the market and how stressed a region’s refining system is, notes Prof. Severin Borenstein, an energy economist at the University of California Berkeley. The suspension of the gas tax in a small state should flow through largely unscathed to consumers. Because even if cheaper fuel prices spur additional demand, globally, it’s a drop in the bucket and won’t suddenly move needles for oil suppliers or refiners. In a larger state like California, which also happens to have limited refining capacity, tax cuts are particularly ineffective because those cuts are more likely to go to refiners. In particular, both California and New York are considering consumer discounts.

The scale of the problem will be exacerbated if the gas tax cut is applied more broadly. A cut in the US federal gas tax, modest as it is (18.4 cents a gallon), could affect demand enough to push oil prices higher, Mr. Borenstein notes. The US accounts for about a fifth of global crude oil demand. As more countries begin to introduce fuel tax cuts, such measures could fuel demand at the worst possible time.

By putting the focus on gas prices, governments also seem to be jumping on public sentiment. A national poll conducted by Quinnipiac University earlier this month found that 71% of Americans support a ban on Russian oil even if it means higher US gasoline prices. This sentiment is bipartisan and comes despite the fact that nearly two-thirds of Americans said the price of gasoline was either a very serious issue or a fairly serious issue.

If household finances are to be cushioned, some form of direct payment could be a more effective solution, particularly when targeting households that feel most constrained. Although gas demand is generally relatively price-insensitive (drivers cannot switch cars or commute immediately), high earners today have much more flexibility to work from home if they so choose.

Lowering duties on the one product whose price is displayed on huge signs on every major thoroughfare has obvious political appeal. Unfortunately, it’s a leaky way to shield consumers.

Russia’s attack on Ukraine helped push oil prices above $100 a barrel for the first time since 2014. For example, rising oil prices could further fuel inflation across the US economy. Photo illustration: Todd Johnson

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