Florida Gas Tax Holiday Has Negligible Benefits

With gasoline prices soaring in March, Florida is preparing to give drivers a gas tax holiday in October. A cynic might wonder why the gas tax exemption aligns so closely with election season (lawmakers cite other reasons), but in many ways timing is the least of the problems with the pending gasoline tax suspension in Florida.

There’s also the fact that much of the aid may never end up in the pockets of drivers. It should break the link, at least temporarily, between the act of driving and road maintenance. That it’s more of an incentive to drive during a time of inflation and scarcity (now, at least; for October, who can tell?). And that puts Florida on a collision course with the federal government.

Governor Ron DeSantis (R) initially proposed an indefinite gas tax suspension, then a five-month suspension starting in the new fiscal year in July, but lawmakers cut that to one month. They also agreed to suspend the tax in October, apparently because it comes after the peak tourist season and lawmakers did not want to share the benefits of this tax break with tourists. The delay, however, calls into question whether the policy is doing much to help Floridians currently struggling with the burden of high gas prices.

More reasonably, California Gov. Gavin Newsom (D) and Virginia Gov. Glenn Youngkin (R) have sought to delay planned gas tax increases in the face of revenue surpluses and high gas prices , without requesting the suspension of the current tax.

Florida’s plan, agreed to during legislative negotiations, does not use state revenue growth to cover the costs of the gas tax suspension, but instead pulls in about $200 million from the state’s share of fiscal stimulus funds under the American Rescue Plan Act (ARPA). Federal law prohibits the use of these funds, directly or indirectly, to facilitate a state tax reduction. While the “indirect compensation” provision is the subject of litigation in many states and may well be unconstitutional, there is much less debate about the power of Congress to restrict the direct use of money they provide to states. Florida is at risk of the federal government clawbacking all of the federal aid dollars they use for gas tax relief.

In Florida and elsewhere, a gasoline tax exemption may be good policy, but it is unlikely to achieve its objectives. Fuel prices are high for many reasons at the moment: general inflation, higher transport costs, isolation from Russian markets, etc. Real fuel shortages, as they occurred in the 1970s, have yet to materialize, but high prices are one of the reasons. Prices are high mainly due to rising costs, but high prices also have the effect of limiting consumption. If a state suspends its gasoline tax, some of that reduction may be passed on to consumers in the form of lower prices at the pump, but even in a highly competitive market, the equilibrium price may very well be higher than the price excluding tax. Just because Florida (or any other state) spends $200 million on gas tax relief doesn’t mean consumers will pay $200 million less for gas.

With scarcity looming and inflation skyrocketing, it’s not the right time to artificially inflate demand.

Fuel taxes are prime examples of user-paid excise taxes, where the amount paid is at least roughly proportional to the government benefits received. Most state gasoline taxes are already set too low to fully cover state infrastructure costs, but zeroing the gas tax is a massive subsidy for drivers, shifting the cost of road construction and maintenance to tax revenue streams that disregard use by state taxpayers. Infrastructure. It’s not unreasonable for drivers to be upset about $4-a-gallon gas or take aim at some of the policies that have contributed to those prices. Suspending a tax that internalizes some of the externalities of driving is, however, a misguided way to tackle the problem.

Florida is the first out, but it may not be the last. Lawmakers in California, Georgia, Illinois, Massachusetts, Maine, Michigan, Minnesota, New York and Tennessee have championed the suspensions, and the list grows as the Russian invasion of Ukraine is putting additional pressure on already skyrocketing prices at the pump.

Florida has no personal income tax, but in other states tax refund checks have emerged as a way to return a portion of state surpluses to taxpayers and reduce inflation. and high gasoline prices. These are also imperfect and, by temporarily increasing disposable income, they may even contribute, albeit modestly, to the inflation they are supposed to fight. But they are better targeted than gas tax suspensions and can be an appropriate way to return one-time revenues to taxpayers. In addition to a temporary revenue boost, many states are forecasting sustained revenue growth in the years to come. In these cases, permanent tax rate relief is most appropriate and infinitely superior to gas tax gimmicks.

Policymakers understandably want to be reactive to pain at the pump, and most states have revenue to spare. But there are far better ways to deliver tax relief — short or long term — than an ineffective gas tax giveaway.