On March 18, both Georgia and Maryland temporarily suspended their state gas taxes. The idea is to make gas cheaper, giving drivers some relief from rising prices. On March 24, Connecticut followed. Each state suspended their respective gas tax for different amounts of time, but the hope is it will save people about 30 cents per gallon, the rough amount of each state’s gas tax. Many other states are at least considering similar suspensions, as are federal lawmakers.
Gas tax holidays are nothing new. They are a frequent proposal during times of rising prices because it is one of the few levers politicians can pull to lower prices, which are dictated by a global market no politician can control. And sometimes those proposals get enacted. Four states enacted gas tax holidays between 2000 and 2008. There is a broad consensus in the policy world that gas tax holidays are a bad idea, depriving governments of much-needed revenue to save people fairly trivial amounts of money, usually on the order of a few dollars a month. For example, if the average American driver has a Ford F-150 and drives about 10,000 miles a year, suspending the federal gas tax of 18.5 cents per gallon would pencil out to about $7.50 a month in savings.
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But experts rarely look at whether gas tax holidays even work at the one thing they’re designed to do: actually saving drivers that $7.50 or so per month. One of the few people who has studied this is Erich Muehlegger, an economics professor at University of California, Davis. And he told Motherboard that whether people actually save money is “a bit of a nuanced answer.”
In theory, suspending the gas tax should work well at slightly lowering gas prices. The tax is paid by distributors, the companies that sell the gasoline to the gas stations (some gas taxes are also sales taxes that the gas stations themselves pay but also pass onto consumers). Muehlegger says the economic literature clearly shows that distributors are very efficient at passing the taxes onto gas stations, who in turn are efficient at raising prices on the consumer. When states raise their gasoline taxes, those prices are quickly reflected at the pump.
But the picture gets more complicated when prices go down. Muehlegger says there is an adage in the literature called “rockets and feathers.” This refers to the dynamic that when costs rise, businesses quickly pass that onto consumers and prices rocket up. But when costs fall, they do so more gradually as businesses slowly lower their prices in competition with one another—after all, to rapidly lower prices would leave profit on the table, and that’s not what capitalism is all about—so they fall more like a feather. From the time the gas tax is suspended to when the price actually falls by that amount is pure profit for the gas station and distributors.
And that’s assuming the price actually falls by the full amount of the gas tax. But there’s no guarantee that will happen. Muehlegger said we should expect to see gas tax holidays “significantly” reflected in the prices at the pump, but not necessarily in full.
For example, in 2000, Illinois and Indiana suspended 7 cents of their states’ gas taxes, but only about 4 cents made it to the pump. We’re seeing this dynamic in action right now, albeit less dramatically. When Georgia suspended its gas tax, the price at the pump was about 24 cents higher than it is now, where the state average has steadied around $3.93, according to data the gas purchasing app GasBuddy provided to Motherboard. But the state’s gas tax is 29.1 cents per gallon, meaning about 18 percent of the gas tax savings has not made it to consumers’ wallets. The story is similar in Maryland, where gas prices fell by about 32 cents after the state suspended its 36.1-cent gas tax.
But there’s good reason to believe this isn’t actually saving people very much money. The economic literature tells us that when prices decline, demand increases. While Economics 101 can often be misleading in the real, complicated world, this is not one of those cases. As GasBuddy’s Patrick De Haan tweeted, demand for gas—as measured through the company’s GasBuddy-branded bank card—has risen far higher in Georgia and Maryland since the gas tax suspension than in the rest of the country. De Haan told Motherboard via email that his interpretation of this data is that people are reacting to lower gas prices by buying more gas.
Considering the savings are so little, the lower prices wouldn’t have to induce much demand at all in order to cost people more money than they save. Another way to think of the gas tax holiday is it essentially gives Maryland drivers one “free” gallon for every 16 they buy. That is not very much. A Ford F-150—the country’s most popular vehicle—has a 26 gallon tank and gets about 20 miles to the gallon. Just one extra trip somewhere in or around town that wouldn’t have been taken before the tax holiday would cancel out the savings.
This outcome—that lowering gas prices paradoxically leads to people spending more on gasoline—is not surprising for anyone familiar with the literature on American attitudes towards gasoline prices. Because it is a highly visible number, many people use gasoline prices as a measure of the overall economy even though it is not. When gasoline prices rise, it affects people beyond how much gas they buy. According to a 2012 study in the Journal of Urban Economics, gas price hikes are correlated with people feeling worse about themselves, especially rural men, although this effect fades over time as people adjust their lifestyles to the higher prices. One way people adjust is by buying more on-sale grocery items, a 2010 study found.
In other words, people are very sensitive to higher gas prices, a dynamic clearly taking place in the U.S. today. They may, in fact, be too sensitive, overreacting to the price swings on both extremes. People can be so sensitive about gas prices that it influences their spending habits far more than the actual money it is costing them. It can also affect their perception of their own self-worth. On the other extreme, they can also be so sensitive that when gas prices go down by a relatively small amount, people perceive themselves as saving more than they really are, leading to even more spending on gasoline at the pump.
“I think this is exactly the concern people have with gasoline tax holidays,” Muehlegger said. “Gasoline taxes, one of the roles they play is they’re designed to encourage people to conserve fuel and in the long run perhaps invest in more fuel-efficient cars or alternative fuels.” When politicians signal they will bail American drivers out from market forces, Muehlegger said, “you’re basically removing that incentive.”
