Why Dirt Cheap Gas Right Now Will Probably Mean Much Higher Gas Prices Later On

States may need to get gas taxes way up. So might the federal government.

If you haven’t been out driving much, which a lot of us haven’t, you may not have noticed gas prices are plunging. Crude oil prices are in collapse. In fact, in trading today the price of a barrel of oil went negative. Meaning oil producers (or people who had invested in oil) were willing to pay people to take it off their hands. This is truly shocking. And it’s both the result of the economic abyss created by COVID-19, and an ill-timed price war between Russia and Saudi Arabia that hit right as the pandemic was starting. Too bad there’s nowhere to drive

And that’s really bad for states, especially those that have their gas taxes tied to the price of a gallon of gas, or to inflation. Which according to the National Conference of State Legislatures is about half of all states, accounting for 57% of U.S. population.

Here’s a chart:

If this is too small, click on it and it’ll take you to the source page

The math is simple: if a state is collecting a 10% tax on a gallon of gas and gas is $3/gallon, it gets .30-cents on every gallon, or more-or-less $5 per fill-up. If gas is $1/gallon, the state gets only around $1.65 per fill-up. That’s a huge difference.

If the state’s gas tax is tied to inflation, and prices of goods are going down, the same thing happens. Although perhaps not as dramatically, because a lot of the states that do peg gas taxes to inflation have a floor and a cap built in.

Ironically, states that have variable price and inflation based gas taxes, were considered more “with it” than those with fixed per-gallon gas tax amounts. But now those with a fixed per-gallon charge may actually be better off. Just as a point of reference, state and federal gas taxes in the U.S. on average amount to about .50-cents of every gallon of gas you buy.

Anyway, everything’s doubly bad for state and local governments right now because one of their other main sources of revenue: sales tax, is also plunging with the cratering of economic activity.

And it’s triply bad because when Trump and Republicans passed their $1.5-trillion tax cut package at a time the economy was booming, which mostly went to corporations, they slashed the amount of state and local taxes people could deduct on their federal returns. This may have been at least partly done as “punishment” to Blue State voters who didn’t vote for Trump, because those deductions tended to benefit people living in high tax states, with high income earners and high property values. (Think New York and California.) Republicans didn’t really deny this. Since then, the new rules have made it very hard for those states to raise income and property taxes further even if they really need to raise revenue. (Even back when residents in those states had more state and local tax deductions available on their federal returns, they almost always paid in more to the federal government per capita than they got back in federal spending. For instance, even before the tax cuts passed, California got only 78-cents back for every $1 its residents put in.

And it’s quadruply bad because states don’t have the power to go out and print money like the federal government does, and is doing. So states are extremely reliant right now on being included in federal relief packages, which gives the President a lot of leverage to do things his way or else, and room for favoritism, even though he says he wants governors to take front-line responsibility. Yes, states can go and try to raise money in the municipal bond market, but usually the reason people are willing to buy those bonds is they’re backed by things like anticipated sales tax revenue.

And it’s quintuply bad because states have taken on huge new expenses as a result of COVID-19, whether it’s securing PPE and equipment for their hospitals (at sky-high prices), or building testing programs, or establishing operations to do contact tracking and many of the other things that’ll be needed to “open back up”, and have never existed before.

So states are in a real bind.

Which means if gas prices stay low, they may see some opportunity—or necessity—in raising some money on their own by raising their gas tax. Big time.

And then if oil prices do one day go up as demand goes back up, the states are still likely going to need that revenue to make up for the tons of revenue they are losing now, so they’re not likely to reverse those taxes.

So the end result could very well be gas prices significantly higher than before this all started.

If prices stay low for a while, it might also be tempting to the federal government to try to raise gas taxes–which are fixed at 18.4-cents a gallon– in order to compensate for lost income and corporate tax revenue. A higher federal gas tax is pretty much also always batted around whenever the federal government gets around to talking about infrastructure spending, which is also going on right now.

Even before the COVID-19 pandemic, states were desperately looking for new sources of tax revenues.

The fact that more and more states in recent years started allowing casinos, endorsing sports betting and legalizing marijuana had much more to do with trying to find new sources of tax money than sudden shifts in social attitudes.

For instance, we were startled to learn, during a news conference by Rhode Island Governor Gina Raimondo, that the two very small casinos in that state (now temporarily closed) account for 1/3 of its entire tax revenues.

The Trump Administration’s new rule just a couple of weeks ago allowing more gas-guzzling cars on the road might help a little with gas tax revenues down the road, but not if people can’t afford to drive their cars.

It seems almost quaint right now that the Koch brothers founded Cato Institute less than 2 years ago was railing about how gas taxes were being “diverted to inefficient uses” because some states were spending them on things like public transit instead of building more roads.

Because now they’re going to have to be “diverted” to all kinds of things. Including, for many states, survival.