RAISING THE GAS TAX COULD DECREASE CONSUMER SPENDING
Wednesday October 13, 2021
Due to a decreased demand in light of the Covid pandemic and stay-at-home orders, the price at the pump in 2020 was artificially low since fuel was in relatively low demand. Yet, as the economy moves forward, gas prices have skyrocketed to extremely high levels. Despite these factors, some federal and state leaders have advocated for an increase in the gas tax.
As the economy continues to move forward, the demand for fuel has gone up. According to the Energy Information Administration, the average gasoline cost per gallon in the Gulf Coast states has gone from $1.85 in October 2020, to $2.95 in October 2021. This reflects an increase of 59 percent in just 12 months. Fundamentally, the cost of gasoline directly influences economic activity, particularly on the level of consumer spending.
Despite the market forces that are already driving up the costs of gasoline, some have advocated for an increase in the state and federal gas tax on top of these high gasoline costs. The key argument made for such proposals is the claim that tax increases are needed to increase funding for roads and bridges. However, the quantifiable benefits of increasing funding by raising taxes are questionable when one considers the fact that large amounts of funding have been allocated and then mismanaged.
While an increase on the gas tax might be easier to propose in the midst of low-cost fuel, the recent increases in fuel cost have demonstrated just how much of an impact permanent gas tax increases could have. An understanding of the effect of the gas tax on consumer spending provides some insight into this issue. Tax areas such as the corporate and personal income tax rates have a more general impact on economic growth and spending. On the other hand, the price of gasoline and its accompanying taxes directly correlate to consumer spending and economic activity.
A study conducted by JP Morgan and Chase compared consumer spending trends from periods with high fuel costs to periods with low fuel costs. This analysis determined that for every $1 saved at the gas pump, consumers saved 20 cents and spent the remaining 80 cents directly in the economy. In addition, the study found that approximately 18 percent of the increased consumer spending went to restaurants, 10 percent went to groceries, and the remaining spending was distributed across several other sectors.
All of these economic growth factors carry a strong argument against any increase in the gas tax. On the federal level, there have been proposals to raise the gas tax from 18 cents to 33 cents. On the state level, there have been proposals to raise the gas tax from 18 cents to 28 cents. This would equate to a 25-cent increase per gallon on just fuel taxes.
According to the Mississippi Department of Revenue, the state economy used approximately 4.3 billion gallons of gasoline in the 2020 fiscal year. 2.6 billion gallons were exempt from taxation, mostly due to a policy that government gasoline use is exempt from taxation. This left 1.6 billion gallons of gasoline to be taxed in the state. The gas tax proposals mentioned above would have both caused an approximate $400 million increase in the tax burden on Mississippians. Using the JP Morgan consumer spending metrics mentioned above, this tax-driven increase in gas prices could equate to $72 million in unrealized consumer spending at restaurants, $40 million for grocery stores, and $208 million in the remaining sectors.
Increasing taxes must always be compared against the economic impact of the tax increase. Rather than using gas tax increases to bring more funding to Mississippi's roads, state leaders should encourage free-market economic growth by leaving more money in Mississippi pockets. As economic activity increases, the state's citizens and government can go into a better economic position without increasing the tax burden.