There’s a collective groan, rippling across California, as drivers pull into gas stations and see prices above $5.
Gas prices per gallon are getting higher across the U.S., but prices in California are soaring higher than any other state according to the American Automobile Association. Yesterday, the average price of gas in California was $5.69 — up from $4.68 a month ago — while the national average was $4.32.
Much of what has driven up gas prices over the past several months is outside of California lawmakers’ control: Russia’s invasion of Ukraine, and the sanctions that followed, have spiked prices, combined with the fact that demand for oil has ramped up from pandemic lows faster than supply.
California’s gas prices tend to be higher than other states in part because of higher taxes for infrastructure and environmental fees. State lawmakers raised the gas tax by 12 cents after a fraught battle in 2017 to pay for roads, bridges, transit projects, and more. Then there’s some amount of higher gas prices in California that’s harder to account for, which Severin Borentein, an energy economist at UC Berkeley, has dubbed the Mystery Gasoline Surcharge.
But people are feeling the effects of climbing prices now, and both Democrat and Republican state lawmakers say they want to help. One option is decreasing the state tax on gas suppliers, with the aim of reducing prices. Another, which Gov. Gavin Newsom teased in his State of the State address, is some form of rebate to help defray the higher cost of gas.
Here’s how each of those proposals would work, and what they would mean for Californians.
Decrease the tax on gas suppliers — but by how much?
California taxes gas before it gets sold and uses the money to fund highway improvements and transit projects. Right now that tax — paid by suppliers — is about 51 cents per gallon, which makes it the second highest in the nation, after Pennsylvania’s tax. It increases a little bit each year to keep up with inflation. This July the tax is set to go up by about 3 cents per gallon.
Democrat Gov. Gavin Newsom made a modest proposal in January, before Russia invaded Ukraine: Pause the increase for one year. In other words, don’t let the tax go up by 3 cents this year. The Newsom administration described it as an effort “to potentially lower the price of gasoline” and provide some relief to consumers.
The proposal is so small that “it’s not going to have an effect that anyone will notice,” said Borenstein, the Berkeley economist. Drivers probably wouldn’t notice, but people managing state infrastructure budgets probably would: The plan would cost the state about $523 million in lost revenue. That would mostly wind up affecting funding for state highway projects in a couple of years, according to analysis from the Legislative Analyst’s Office.
Leaders of the majority-Democrat Legislature, which Newsom would need to get on board with his plan, aren’t wild about the idea, saying “our focus cannot be a small cut to the gas tax that might not get passed on to consumers.”
California Republicans have proposed wiping away the whole 51 cent tax in the short term. Last year, Republican state senators proposed suspending the tax completely for a year; this year, Granite Bay Republican Kevin Kiley proposed getting rid of the tax for six months. The six-month proposal would cost the state somewhere between $4 to $4.5 billion in lost revenue, according to estimates from Assemblymember Kiley’s office. In both cases, the lost tax money for infrastructure would be made up for by a one-time infusion of other state funds into infrastructure accounts.
“The gas tax is something that we control as state lawmakers and it is one lever by which we can provide California taxpayers a bit of relief,” said Kiley. It would be impossible for a Republican to get a bill passed through the Democrat-controlled legislature without significant support from Democrats; so far a couple of Democrats have expressed interest in the proposal.
But because the tax applies to gas suppliers, the price of gas would go down only if gas sellers actually pass the savings along to consumers by reducing the price of gas. And there aren’t any guarantees on how much of the savings they’d pass along.
In February, economists at the nonpartisan Legislative Analyst’s Office reviewed research on how changes in fuel taxes affect fuel prices, said Seth Kerstein, an economist at the agency. They estimated that between two-thirds to 100% of the governor’s proposal — or 2 to 3 cents per gallon — would likely be passed along to people paying at the pump. If that same estimated range applies to the Republicans’ larger tax break — which the agency did not analyze — it would translate into roughly 34 to 51 cents per gallon in savings at the pump.
Generally, economic theory would say that larger tax changes would get passed through in the same way as smaller ones, said James Bushnell, an energy economist at UC Davis. But gas tax changes are also generally much smaller than 51 cents, so the research has been focused on the impacts of smaller changes, he said.
That was before Russia invaded Ukraine and the sanctions on Russian companies and gas that followed threw the international gas market into flux.
Gas tax breaks “come up every time there’s some kind of oil shock,” said Bushnell. “And that’s the absolute worst time to cut these taxes if the goal is to relieve customer prices.” Gas sellers are less likely to pass all of the savings on to customers when the supply of gas is constrained.
In other words, while the war is affecting the gas supply, a gas tax cut could mean more profits for gas sellers, and less of a price reduction.
On top of that, California may have a less competitive market for gas distribution and retail than other states, Borenstein, the Berkeley economist, has found. Far more gasoline in California “flows through stations that are owned by refiners or have long-term contracts that give the refiners significant control over gas prices,” he wrote. That could make it even more likely that sellers pocket some of the savings of a gas tax break for themselves.
In addition to the question of just how much tax breaks would actually save consumers, Borenstein said reducing or getting rid of the gas tax would be bad policy.
“We need gasoline prices to reflect the real costs to society,” said Borenstein, referring to the negative effects of greenhouse gas emissions, air pollution, as well as costs of cars hitting other cars, bikers, or pedestrians. When you add up all those costs, gas taxes are actually too low, he wrote in an analysis of the governor’s proposal.
Checks from the state for high gas prices
During his State of the State address on Tuesday, Newsom unveiled another idea for helping Californians with high gas prices. Or, at least, the germ of an idea.
“I’ll be submitting a proposal to put money back in the pockets of Californians to address rising gas prices,” he said. The proposal will be a tax rebate and give billions of dollars to Californians, a spokesperson for the governor said, though it’s not clear yet who exactly will get the money and how much they will get.
The money may be tied to owning a car that’s registered with the state, said Dee Dee Myers, an economic advisor to Newsom. People who have switched to other modes of transit to reduce their carbon footprint aren’t wild about that idea.
It could also wind up looking like the stimulus checks California sent out last year, said Chris Hoene, executive director of California Budget and Policy Center. If the last stimulus program is an indicator, the state could send out checks a couple of months after lawmakers reach an agreement, Hoene said.
Funding could come from the state’s estimated $21 billion surplus. But there’s a lot of “ifs” and “maybes” because most of the details still need to be worked out with the legislature.
This proposal would also ensure that money intended to reach Californians actually does, said Bushnell, the UC Davis economist.
Sending out checks to everyone — if lawmakers go that route — would also be more economically equitable than lowering the price of gas, said Borenstein.
Wealthier people use more energy than poorer people on average, so lowering the price of gas would help them more. If lawmakers send out checks, they could choose who gets how much.
A rebate could also help Californians deal with other rising costs, like rent and electricity. For most people those other costs actually make a larger dent in their bank accounts than gas, said Borenstein, but they aren’t as publicly visible.
As the U.S. turns away from Russian oil, there’s a fundamental reality that we’ll have to make do with less fuel, said James Hamilton, an energy economist at UC San Diego. And when it comes to gas prices, Hamilton doesn’t think good news is right around the corner. “I think they’re headed up before they come down.”