Gas Tax Holiday Debate in Connecticut

May 23, 2007

With gas prices again approaching record highs, many lawmakers at the state level are responding with the “do anything” mentality, which typically includes short-run gas tax holidays. The latest comes from the state of Connecticut, courtesy of NBC-30 Hartford.

Republicans in the state House of Representatives are fuming after they were turned away by majority Democrats in their attempt to cut the state’s gas tax this summer.

Republicans want to suspend the state’s 25-cent-per-gallon gas tax from Memorial Day to Labor Day. House Minority Leader Lawrence Cafero Jr., a Republican from Norwalk, proposed an amendment, but Democratic leaders took the proposal off the House floor.

Republicans are accusing Democrats of ignoring the needs of taxpayers. They say the state’s $846 million budget surplus is more than large enough to cover the $120 million in revenue that would be lost from suspending the tax.

Gas tax holidays are typically bad tax policy. First, the revenue must be made up somehow unless the state cuts spending. (In the case of a surplus, that still means that some spending is foregon or some other tax cut is foregone.) Therefore, another tax is going to have to go up or spending will have to be cut. Second, cutting the gas tax may not have much effect in the short-run due to relatively inelastic short-run supply, meaning much of the benefit of holidays will flow to the producers (i.e. stockholders of oil and gas companies). The longer the tax cut, however, the greater the benefits to consumers.

In the end, passing a gas tax holiday that would raise another tax would likely lower overall welfare due to the fact that the gas tax is less distortionary than other taxes, like income. And even if it were the opposite such that raising that revenue amount using the gas tax were better economically than another source, such as a higher income tax or lower spending, then a permanent gas tax cut with lower spending would be preferable, or a higher tax on that other source. A temporary fix makes little sense.

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