This is an article that I am starting to write before I know the answer to the question I posed in the title.
Earlier this year, in an effort to combat high gasoline prices, New York decided to waive fuel taxes for the remainder of the year. The $0.16/gallon suspension began on June 1 and is scheduled to run through the end of the year.
My thesis at the time — described in the June article Why A Gas Tax Holiday Probably Won’t Work — was:
“If you assume that gasoline is priced based on supply and demand, cutting gas taxes does nothing to address supply, and potentially increases demand. Thus, you could easily see gasoline prices quickly rebound back to where they are now following a gas tax cut. It’s just that the 16 cents that is currently captured by the federal government would just move elsewhere in the supply chain. It would improve the profits of the retailer, refiner, and oil producer to varying extents.”
In a nutshell, those floating the gas tax holiday have a fundamental misunderstanding of how gasoline is priced. Gasoline is a commodity that is priced in the market. Refiners don’t add up the inputs, include a profit margin, and then ad in the gas taxes. Instead, the profit margin floats up and down with the price, which is based on supply and demand. That’s why oil company profit margins are so volatile. But it’s also why I felt a gas tax holiday wouldn’t work.
So what has happened since then?
According to the Energy Information Administration (EIA), through June 1st the national average retail price of gasoline was $4.02 per gallon. The average price over that time frame of gasoline in New York was $4.10 per gallon, for a differential of $0.08/gallon.
If the gas tax holiday was perfectly efficient, we expect a shift in the differential of around $0.16 per gallon versus the national average. Assuming everything else is consistent, we could expect the price of gasoline in New York to be about $0.08 gallon cheaper than the national average.
From June through November of this year, the national average price of gasoline was $4.22 per gallon. But, the average for New York over that time period was also $4.22 per gallon. So, there was a decline of $0.08 per gallon versus the national average price.
This suggests that the gas tax holiday may have made some difference. But, what happened to the other $0.08 per gallon? It was captured by other areas of the supply chain, as I warned would probably happen.
That was also the conclusion of an article that looked at this issue back in October.
An analysis by the Institute on Taxation and Economic Policy (ITEP) for New York Focus showed that less than 50% of the tax savings made its way to consumers. The article estimated that 30% was being retained by the oil industry, which is consistent with the argument I made earlier. However, I will admit I thought it would be more than 30%.
But, the analysis here supports my thesis in June that a gas tax holiday is an inefficient way to combat high gas prices. It does nothing to address supply, while potentially increasing demand. However, I can’t say that it didn’t work at all, only that it didn’t work well.
By Robert Rapier
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