The Indy Star has an article entitled Gov. Mitch Daniels weighs Indiana gasoline tax options. This is part of the ongoing series in which Democratic Speaker Pat Bauer scores political points off of Gov. Daniels by calling for the Governor to suspend the state’s gas sales tax on gas.
I tend to agree with the Governor that this is a bad idea. To me, that would amount to the State subsidizing oil company profits. And, in any event, it would just be a drop in the bucket. $0.06 out of an average cost of $3.20 per gallon amounts to a 1.8% saving. The sales tax on gas is $0.06 per dollar which would amount to a 6% savings. Meanwhile, the State will have to look elsewhere to replace the lost tax revenue.
Still, it’s probably effective politics by Bauer. Folks will probably just perceive that gas prices are hurting them badly, and have a notion that Gov. Daniels could do something to help but won’t. This will add to the general narrative that Gov. Daniels is mainly a servant of the wealthy in our society and does not have a great deal of interest in the working class citizens of Indiana. And Bauer does have a point in that, the way the sales tax is structured — calculated based on the price of the gas; the State gains more revenue as gas prices increase.
Update My mistake. I seem to make the same mistake every time this comes up. The sales tax on gas is distinct from the excise tax. The excise tax (back in 2006, anyway) was 18 cents per gallon for the state and 18.4 cents per gallon for the federal government. The sales tax is just $0.06 per dollar. I wonder if it would make sense to cap the sales tax to a maximum of $0.12 or $0.18 per gallon or something.
What do you think of Jill Long Thompson’s idea of witching to a gallon-based (rather than a price-based) gas tax? It seems like that would make the tax a little less regressive, while maintaining the tax income for the state. I’m definitely not an economist, but that seems like the most realistic solution I’ve heard.
As much as it pains me to say it, I agree that Daniels is right on this one. Suspending the gas tax seemed goofy back in 2000 or whenever it was when O’Bannon did it, back when it seemed like $1.89 per gallon was a lot to pay. What I wouldn’t give for those prices now! And I think it wouldn’t necessarily be a bad thing if high gas prices created market pressures to develop alternative energy sources & more fuel efficient vehicles.
Supposedly, Jill Long Thompson is going to be giving me an interview in the next few days, and I will be asking her the big question I have regarding her per-gallon proposal: What happens five or ten years from now when the tax needs to be increased to adjust for inflation, etc? As we have seen from the state and federal excise taxes, legislatures are going to be hard-pressed to increase a tax, (especially state legislators.)
That’s the big problem I see with her proposal, even more than the immediate loss in revenue. I would rather avoid another setup that is doomed to create a political deadlock later on when we need to increase revenue.
For those who want to read the applicable law:
Indiana Code 10-14-3 – scroll to sections 13 and 14 for the current law.
Two things to note:
1) O’Bannon suspended the tax in 2000 – the current law dates to 2003, if I’m reading the citation correctly. This would seem to mean that Daniel’s powers under the law may in fact be different from what O’Bannon’s were.
2) The language is not crystal clear on this point, but this seems mostly intended to address a possible energy SHORTAGE (I can’t think of any other kind of energy emergency, myself).
Lowering the price of a good or service is not an effective way to address a shortage – not here on planet earth, anyway.
When O’Bannon suspended the tax there was no shortage, and no emergency as I understood the term.
It sure looked good to the majority who look at price tags without thinking about the underlying economics, though. (Which I confess is also me, most of the time…)
Whether there is a shortage or not certainly depends on whether you believe the currrent oil company explanations of the price increases. But as they tell it – there is insufficient supply due to inadequate refining capacity causing a price spike as demand outflanks supply. When demand outflanks supply – that is usually called a “shortage.” And whether or not dropping prices is an appropriate manner of dealing with a shortage depends on whether one views the shortage from the vantage of easing the pain caused by the shortage or from the vantage of altering the supply/demand equation. Viewed from the short-term, the latter is not practically within the scope of a governor, but the former is.
The commodity belongs to the people who produce it, until it is sold to the people who agree to buy it at a particular price. Frankly, I don’t believe the producers of gasoline have nearly as much to explain for the variable nature of day-to-day prices as consumers do for their ability to wail and moan without doing a single thing to alter their consumption.
In economics, the phenomenon is called “price elasticity”. In the case of gasoline, the price is highly elastic: it is being shown that consumers are willing to buy the product without regard to price.
It was eye-opening for me to sit in an economics class seven years ago and watch the professor give an impromptu demonstration of price elasticity. The class was mainly comprised of working professionals pursuing an MBA. At the time, gas was about $1.40/gal. He had everyone stand up. He said, “gasoline is now $2/gallon. Sit down if you stop buying”. Nobody sat down. “$3/gallon”. A small handful of people sat down. He increased at $1 increments, and at $6/gallon, almost half the room was still standing. I was still standing.
In that light, it is entirely possible that gasoline is actually underpriced, and has been for years. The market is bearing these prices, all while being decried as ‘outrageous’. Actions speak louder than words.
Also interestingly in this class, there was a group that did their price elasticity project on bus riders. The fare was $1/ride with transfer. They found by surveying actual riders that their average rider surveyed would continue to ride the bus up to about $4/ride.
The conclusions we reached were that people made choices that caused them to be dependent upon transportation. Mainly, they choose to live far from their workplaces.
I have no sympathy for the person who chooses to buy an SUV when gas is at $1.80/gal on the assumption the price will never rise, or who argues that because they made that choice, the oil producer and retailer owe them an ever-flat price. Likewise for the person who works downtown and lives in the city. You help create sprawl? Suffer your commute and its costs!
We are such a society that wants to have its cake and eat it too.
So, to the point- no, the governor shouldn’t suspend the gas tax. The taxes pay for the roads. Saying one is in favor of suspending the gas tax is saying they favor the roads crumbling while promoting their use of them. Short-sighted foolishness.
Mike –
Interesting comments – I can, though, come up with one scenario where suspending the gas tax could ease an Indiana shortage. (Somewhat rebutting my own posting, I know!).
If Indiana suspends the tax without controlling the price, we might get some supplies that would otherwise go to surrounding states, since the gas could be sold here at the same price as say, Kentucky – but with a greater profit margin to the supplier.
No price reduction to the end-user, though, in this case (unless the supplier ‘splits the difference’).
Sorry, Bauer’s just showing again why he shouldn’t be in elected office. He, yet again, is pandering. What’s sad is that his act works with a large portion of Indiana voters.
If the tax was set on a per unit of measure basis, tax revenues would fall with increasing price, potentially exposing the state to being in a position of not being able to repair roads in case of a sustained rise in fuel price. The proposed increase in CAFE to be imposed on the automakers will likely force an increase in the highway use tax eventually.