Gas Tax Holiday Less Effective Than Previously Thought

A report from the University of Pennsylvania shows that savings from gas tax holidays are only partially passed on to consumers. 

The University of Pennsylvania (UPenn) recently released a report examining three states which implemented a gas tax holiday in response to escalating gas prices. Connecticut, Georgia, and Maryland each implemented temporary gas tax holidays ranging from a month in Maryland, ten weeks in Georgia, and three months in Connecticut. The report finds that in none of the states, 100 percent of the savings were passed onto consumers.

Highlights:

  • Maryland: 72 percent of tax savings passed onto consumers
  • Connecticut: 71 percent to 87 percent of tax savings passed onto consumers
  • Georgia: 58 percent to 65 percent of tax savings passed onto consumers

These findings are significant because they show gas tax holidays do not provide the relief many policymakers and motorists initially believed. In all three cases, companies that operate gas stations pocketed a portion of the tax savings intended for motorists (up to 42 percent in the most extreme case). The report underlines one point that many in government grapple with regularly; quick and easy policy solutions are few and far between.

A Maryland Context:

Maryland has a unique federated system of local control. As a result, counties operate with a high level of autonomy and provide a substantial amount of public services. Long-time Conduit Street readers will know that many of these services are funded through a taxing model known as Highway User Revenues (HURs), i.e., the share of State motor fuel and vehicle taxes distributed to local governments. HURs come primarily from gas taxes, vehicle registration fees, corporate income, rental cars, and vehicle titling; all of which are down significantly due to the impacts of COVID-19.

Because so much is done at the county level, gas tax holidays can have a detrimental impact on public services. During this year’s March-April holiday, the General Assembly backfilled those lost revenues with surplus funds. But suppose the General Assembly were to move forward with another gas tax holiday, there is no guarantee they would backfill those lost revenues again, equating to the prospect of severe fiscal consequences. So far, leadership within the General Assembly appears to recognize the real cost-benefit of this policy, resisting calls for a special session to extend another gas tax holiday.

Regardless of if Maryland adopts another gas tax holiday, one issue looms large on the horizon for many across the state’s 24 jurisdictions. Nearly all local transportation infrastructure funding comes from HURs, of which the gas tax makes up a sizeable portion. Since HURs do not include a tax on Electric Vehicle (EVs) charging stations or electricity consumption, there will presumably be a drop in local transportation infrastructure funding. As Maryland moves toward full electrification, the current HUR model needs to be amended to include EVs, or risk losing robust investment in roads, bridges, and public transportation. The question of taxing EVs or finding a replacement for HURS will be a hot agenda item in future legislative sessions.

Read the full report.

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