Don’t Cut the Gas Tax for Summer Holidays, Double It

I woke up yesterday morning to news that the Comptroller of Maryland is urging the state to eliminate its 23.5 cent gas tax for all holiday weekends this summer. The comptroller, Democrat Peter Franchot, has made no secret of his political ambitions and this scheme will surely win him votes.  But it is terrible tax policy.  

Franchot acknowledges his gas tax holiday would reduce state revenues by about $2 million-a-day. Maryland, it happens, faces a $1.4 billion budget shortfall for 2012. So why would he propose this? It would, he insists, “be a big boost for the state's economy and most of all, it would just give our citizens a break."

I have seen no evidence that the former is true. It may be that lower gasoline prices over an extended period can boost the national economy. But would lowering prices for 2-3 days improve a state’s economy? I don’t think so.

Would a gas tax holiday “give citizens a break?”  Sure, but perhaps less of one than Franchot hopes. Joseph J. Doyle and Krislert Samphantharak  found that gas stations will pass on some—but not all—of a temporary tax cut to customers. Once the tax holiday ends, gas prices may be higher than before the tax. So yes, people will get something of a break. But not a huge one.  And it may not last long.

Keep in mind that even if the entire tax cut were passed on, a typical driver might save about four bucks on a tank of gas. The bigger your gas-guzzler, of course, the more you save--though I am not sure that is Franchot’s intent.  

How about his other claim? Would a gas tax holiday really boost the state’s economy?

A few interstate drivers might delay buying gas for a few miles to take advantage of Maryland’s lower prices—if they even knew about them. And perhaps they’d buy a bag of chips while they were taking a break. Otherwise, it is hard to see much new economic activity from out-of-staters.

Just think about it for a minute: People make summer vacation plans months in advance. Would they really change beach houses to save $4.00?  

And if they did, this hair-brained idea might actually encourage Marylanders to spend more of their money out-of-state rather than at home.  Maryland is a small state and if lower gas prices spurred people to drive longer distances for their vacations, Marylanders might end up buying more in Pennsylvania or Virginia. If Franchot really wants to encourage Marylanders to stay closer to home and spend their money at the local mall, he should raise holiday gas taxes and prices, not lower them.  

Then there is the matter of timing. If I am running low on July 3, I might wait to the 4^th to fill up so I can take advantage of the tax holiday. The state loses $2 million, but nothing else has changed.  In fact, if I was really running on fumes on the 3^rd, I might curtail my driving (and other economic activity) for a day so I could make it to the 4^th.

Worst of all, though, is the policy signal Franchot is sending. Any sensible government official with an eye on economic, environmental, and geopolitical issues should want to discourage consumption of oil. Instead, he is pandering to those who want to consume more.  And, by doing so, he would cost his cash-strapped state millions of desperately-needed dollars.

Maryland and the nation would be a lot better off if politicians such as Franchot doubled the gas tax on holiday weekends, rather than eliminating it.  Congrats to Maryland Comptroller Peter Franchot for the dumbest tax idea of the week.