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California Governor Newsom will give $400 to households with one car and $800 to those with two cars. Other states have suspended their gasoline tax. Which approach is the most effective?

California Governor Newsom will give $400 to households with one car and $800 to those with two cars.  Other states have suspended their gasoline tax.  Which approach is the most effective?

Although gasoline prices have retreated from their record highs in recent days, that has not been the case for many.

The longer high prices at the pump persist, the more state and federal lawmakers are trying to find ways to ease drivers’ financial hardship.

They’ve floated two types of ideas so far: gas tax breaks and rebates that would send money directly to motorists to defray their gas costs.

The question is whether either approach can make a meaningful difference to personal budgets at a time when inflation has been driving up prices for months and the Russian invasion of Ukraine continues. Gas tax breaks are flawed, some experts say. Discounts are better, but far from perfect, they add.

On Wednesday, California Governor Gavin Newsom unveiled a plan that would send $400 debit cards to every household with a car registered in the state, where average gas prices are the highest in the country. The plan would distribute a maximum of two debit cards, or $800, per household. The proposal would also foot the bill for bus or train fares for three months to help those without a car.

“This direct help will solve the problem that we’re all struggling to solve, and that’s the gas price problem,” said Newsom, a Democrat. noted on TWTR Twitter,
+2.16%,
as he unveiled the proposal. The first payments could start in July. Drivers in the state pay about $300 in gas taxes per year, said his office.

Thursday’s national average gasoline price was $4.23 a gallon, down 10 cents from the record set on March 11, according to AAA. California’s average price on Thursday was more than $1.50 above average, at $5.88.

Newsom’s proposal joins other direct money ideas, including the federal government Gas Reimbursement Act, introduced by three Democratic lawmakers. This bill would send $100 (plus $100 per dependent) to households for any month in 2022 that the national average gas price exceeds $4.

As these ideas surface, more states are suspending their gas taxes — much to the satisfaction of voters looking for any kind of cost reduction. About three-quarters of voters said they support a halt to federal and state gasoline taxes, Morning Consult/Politico poll released on Wednesday.

Georgia suspended its 29.1-cent gasoline tax through May, and Maryland suspended its 36.1-cent tax for 30 days. Connecticut The 25-cent tax is scheduled to stop from early April to late June. (Florida lawmakers paved the way for a gas tax stop in October.)

The federal government assesses a gasoline tax of 18.4 cents/gallon and the revenue goes to the Highway Trust Fund, just as state gasoline taxes help fund state highway maintenance.

In total, taxes make up 14% of the cost of a gallon of gasoline, according to the US Energy Information Administration. By far the highest cost is crude oil and its price accounts for 61% of the cost of a gallon of gasoline, the agency said.

Nearly 20 other states are now considering breaks or at least smaller gas taxes for varying lengths of time, said Jared Walczak, vice president of state projects at the Tax Foundation, a right-wing think tank.

For Walczak, a gas tax break of any length is “poorly targeted tax policy that does not address the root cause of high gas prices.” When Walczak lists his reasons against such tax holidays, he notes that there is no guarantee that all of the tax savings will be passed on to drivers.

He pointed to the Maryland and Georgia breaks, which happened on the same day, March 18. Thursday’s average price in Maryland was $3.79, down 41 cents from $4.20 a week ago, according to AAA data. Georgia’s average price fell 25 cents from $4.24 to $3.99.

A refund is “slightly better,” he said.

On the plus side, a rebate is money the driver can apply to all sorts of price increases while tax money continues to be used for road maintenance, he said. “It’s better than a gas tax suspension, but it still does nothing to improve the economy’s growth or improve long-term outcomes,” Walczak said.

Walczak was also worried that any one-time cash injections would drive up all sorts of prices even more when supplies are tight.

“A rebate is a better solution than a gas tax holiday, but it’s not without its problems,” said Erich Muehlegger, an economist and professor at the University of California, Davis, who has studied the interaction between consumer behavior and gasoline taxes.

A rebate would not affect the price of gasoline, he said, but consumers would “still face a strong incentive to save gas, use other modes of transportation, or consider vehicles which have higher fuel economy or which use alternative fuels”.

The money goes directly to people, reducing the worry that consumers will lose the edge if companies don’t lower their prices. “But, like gas tax holidays, we should think of gas tax refunds like any other form of public spending – if we return money as a gas tax refund. essence, we cannot use this money for any other purpose,” Muehlegger noted.

The price of the California debit card program could be a estimated at $9 billion. That’s about the amount California had for a vehicle electrification initiative, he noted. The debit cards would go to wealthy families and electric car owners in the band of households watching gasoline prices closely.

“So while the $400 debit cards would be welcomed by many California households feeling the pain of rising gas prices, some of the money would go to households that don’t have been affected in the same way,” Muehlegger said.

Newsom’s political critics were unimpressed with the refund proposal.

“A gas tax holiday hastens relief for Californians who are crushed by higher costs for all basic necessities. California Republicans are united in calling for an immediate gas tax suspension, but Gavin Newsom and legislative Democrats are unwilling to change oppressive tax laws,” said California Republican Party Chairwoman Jessica Millan Patterson.

Noting that it could be months before the rebates arrive, she added, “Democrats are talking about a good game, but Californians have to keep paying more and waiting.”