California Politicians Hiked Gas Tax, Now Demand Investigation Into State’s $4 Per Gallon Gas Prices

Yesterday, I wrote about price elasticities of demand and tax incidence: basically, who bears the burden of a tax.

If the cigarette tax goes up, for example, the sellers can hike prices and pass the burden of the tax on to the consumer. Smokers are addicted (I say this as an ex-smoker myself) and it is hard to just suddenly stop in the face of a price rise. In this case, we say that demand is ‘price inelastic’. Of course, the sellers will be less able to do this where smokers have the option of buying their cigarettes in a lower tax state. This will tend to make the demand more ‘price elastic’. The price elasticity of demand will differ, then, depending on where these alternatives are available. It will be more elastic somewhere like Albert Lea, a short drive from Iowa with its $1.36 per pack tax, than in Motley.

The short version is that where demand is price inelastic – like with cigarettes, especially in Motley – a tax hike will lead to higher prices as the consumer bears a larger share of the burden of the tax.

Lessons from California

So what might happen to gas prices in Minnesota if the gas tax hike of 70% goes through? Evidence from California suggests that consumers will pay the price at the pump.

As Reason writes,

As lieutenant governor, Gavin Newsom supported a 2017 bill increasing the state’s gas taxes. When running for governor in 2018, he opposed a ballot initiative that would have repealed that same increase. It’s 2019, and Newson, now the state’s governor, is demanding an investigation into why the state’s gas prices are so high.

On Tuesday, the governor sent a letter to the California Energy Commission (CEC) asking that the state agency investigate the Golden State’s roughly $4.03 per gallon gas prices, currently the highest in the country (and well above the national average of $2.86 per gallon).

Newsom is not alone in wanting answers to this difficult head-scratcher.

In January, 19 state legislators—17 of whom had voted in favor of that 2017 gas tax increase, while the other two had only entered office in 2018—sent a letter to State Attorney General Xavier Becerra demanding that the state’s Department of Justice (DOJ) investigate the “unexplained gasoline surcharge” that was estimated to cost Californian families $1,700 a year.

California currently imposes the second-highest gas taxes in the country. A state excise tax currently adds $.417 per gallon, a rate that will increase to $.473 come July. On top of that, the state imposes a 2.25 percent gasoline sales tax.

In addition, California has adopted a low-carbon fuel standard and a cap-and-trade scheme for carbon emissions which together increase the state’s gas prices by $.24 per gallon above the national average, according to a 2017 state government report.

Most of the consequences of any action are unintended

It is possible that Gov. Newsom really did think that gas taxes could be hiked without driving up prices. There are, after all, very many people for whom economics is just something that happens to other people. Sadly, most of them seem to be in politics.

But what we have here is another example of the dynamic of Intervention > Unintended consequences > Intervention… And so government intervention just grows, like Topsy.

A gas tax hike will push up up gas prices in Minnesota. It would, perhaps, be expecting too much of our politicians to leave their meddling at that.

John Phelan is an economist at the Center of the American Experiment.