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Here’s Why Cutting Gas Taxes Doesn’t Work When Prices Soar

A new Urban Institute study finds tax rebates are a better solution, while efforts that discourage driving would have the most significant long-term impact on the inflation problem.

A sign showing the prices at a gas station.
A sign displays current fuel prices at a gas station in Arlington, Va., on Wednesday, March 16, 2022.
Since the beginning of 2022, fears about escalating gas prices have dominated the public consciousness. Even in late January, with sky-high omicron case counts, articles began circulating about $100 barrels of oil by summer.

They came much sooner than that, thanks to Russian President Vladimir Putin’s war in Ukraine, breaking into triple digits on March 1. Two weeks later AAA reported that the average gallon of gasoline reached $4.32, the highest price (not adjusted for inflation) since the Great Recession. Prices are likely to go up more in the summer months.

This all comes at a time when America is more gas hungry than ever. As of 2019, Americans drove 14,263 miles a year — almost 5,000 more than the next most car-centric country.

“Compared to the oil crisis of the 1970s, more Americans drive and Americans drive more,” says Kate Lowe, professor of urban planning at the University of Illinois, Chicago. “It’s more challenging to capture mainstream attention and question our auto dependency versus 50 years ago.”

During the oil shocks of the 1970s, speed limits were reduced, fuel efficiency standards instituted, and year-round daylight savings time implemented. This time, politicians of both parties have avoided such parsimonious policies and instead focused on making gas cheaper.

A new report from the Urban Institute catalogs state-level responses and finds that 20 different states have introduced legislation to suspend gas taxes, which are often used to fund infrastructure projects. (Florida, Georgia, and Maryland have already passed gas tax holidays.) There are 16 states considering legislation to provide payments to residents — in the form of tax rebates, credits or stimulus checks — to counteract pain at the pump. Only three are considering changes to help people avoid driving: California, Connecticut, and Hawaii.

“Of the three main categories of policy solutions we could be considering, cutting gas taxes is the worst,” says Jorge González-Hermoso, research associate with the Urban Institute. “It’s very popular, it will get you headlines, but it only creates a simulation that the government is providing a solution.”

González-Hermoso says the problems with gas tax holidays start with the premise that they help consumers. The average gas tax across all states, he reports, is 31 cents a gallon or 7.75 percent of the average price. By one estimate, a driver would have to use 20 gallons of gas a week to save just $30 over the course of Maryland’s one-month holiday. There is no guarantee that station owners wouldn’t pocket the difference, and keep prices roughly the same.

In addition to being ineffective, this policy imperils future infrastructure projects. State and local gas taxes comprise 26 percent of highway spending and often contribute to mass transit as well. They also have the disadvantage of incentivizing driving, as residents in nearby jurisdictions try to take advantage and local consumers know relief is contingent upon buying gas.

Tax rebates or stimulus payments are a better option, González-Hermoso argues, as they can be spent on anything. In a context of high inflation, it gives people the freedom to decide where to spend relief money. After all, gas isn’t the only commodity price on the rise and this way funds won’t necessarily go towards more driving and more emissions.

Paired with policies like free transit, payments could be especially powerful in denser, more transit-oriented areas. But only Connecticut and California are proposing fare-free transit as a means of easing transportation pressures during the gas price spike. Even in the most liberal spaces, car-oriented relief measures dominate the conversation. California Gov. Gavin Newsom wants a $400 refund for every car a household owns, a decidedly regressive option.

“When we have high gas prices, people suffer,” says González-Hermoso. “But let’s take this moment to reflect on why we are so vulnerable to price volatility. It’s very hard to always have low gas prices. The real problem is why are we so dependent on cars?”

The Need for a Long-Term Solution

Since the 1970s, the number of vehicles per household has increased every decade while residential development patterns have created more communities where driving is a necessity. Today, transportation generates the largest share of American carbon emissions. Politicians of both parties have little appetite for addressing that fact.

Biden’s administration came into office promising big changes in energy and climate policy, canceling the Keystone XL pipeline and pledging to eliminate fracking on federal lands.

But for months before Russia attacked Ukraine, the administration’s focus on checking rising gas prices was already evident.

After the invasion began, Biden promised “I will do everything in my power to limit the pain the American people are feeling at the gas pump, this is critical to me.” Since then, he’s made the largest ever release from the nation’s strategic oil reserves, is pressuring domestic producers to pump more oil and is negotiating with Saudi Arabia and other petro-states to do the same.

Democratic governors, many of whom face competitive election campaigns, have led the charge for gas tax holidays. In West Virginia, Democratic lawmakers are pursuing this policy, which the Republican governor dismisses as a “political stunt.”

González-Hermoso argues that to protect Americans from future price surges, policymakers need to make them less vulnerable to the fluctuations of a volatile commodity. He advocates for designing denser communities, making roadways safer for non-car users, and increasing public transit access. The time is ripe, as driving becomes pricier, for beginning such changes.

But previous fuel crises have not led Americans towards long-term policies that ease the nation’s fuel addiction. In the 1970s, policymakers tried to get people to slow down, drive less and ride the bus. But that decade also saw the most dramatic flight from the nation’s cities into sprawling auto-centric communities. Far fewer Americans take public transit today than they did then, and the numbers have tanked during the pandemic, with no sign of a full recovery.

As Henry Grabar at Slate outlines, the price surge during the Great Recession was also projected to encourage more people to live in denser communities, drive less and use more fuel-efficient vehicles. None of that happened. The vaunted return to the city is real, but limited. Vehicles per household kept increasing, transit ridership stagnated even before COVID-19 hit, and SUVs and trucks have come to dominate the auto market.

“There’s a whole host of social and structural changes that continue to spur automotive use,” says Lowe. “You can see that in the infrastructure bill, which was very skewed towards roadways. The public sector continues to ease driving.”

In the short term, Lowe recommends easing pain at the pump through means tested user subsidies like a program being considered by Chicago that limits access to those at 100 percent of area median income, and gives recipients a choice between a pre-loaded card to pay for transit or gas. In general, Lowe favors direct payments to lower income households that give them maximum freedom to decide how to ease inflation’s pain. In the long term, policymakers need to finally learn the lessons of the past and drive us towards a more moderate relationship with cars.

“It’s not realistic to see mode shift tomorrow, because the investment in transit and sustainable travel is not there,” says Lowe. “Politicians, understandably, need to respond to acute needs. But we also have to think about the historic choices we’ve made that have put people in these situations where they don’t feel safe walking half a mile to the grocery store.”
Jake Blumgart is a senior writer for Governing and covers transportation and infrastructure. He lives in Philadelphia. Follow him on Twitter at @jblumgart.
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