Friday, September 02, 2005

Gas Tax: What's Iowa going to do?

This week’s news coverage on the ever-changing discussion around the price of gas is a bit schizophrenic.

Monday, Gov Vilsack commented on a letter he sent to the DOJ asking for an investigation into gasoline price gouging. On the same day Mark Wandro, the head of Iowa’s Department of Transportation, was out in Sioux City commenting on the need to increase the gas tax.

Tuesday, Mark Wandro resigned as head of transportation to take a job in the private sector. All spin out of state government pointed to Wandro’s departure as an expected move. Yeah, sure.

Thursday, the DMR* publishes a front page, above the fold story that, inexplicably, focuses on cutting taxes on gasoline & diesel, no mention of the Wandro resignation, no discussion of the Vilsack DOJ letter. The DMR reporter just asked legislative leadership whether cutting the gas tax is on the table.

… Motorists shouldn't look to the Iowa Statehouse for any tax relief to deal with soaring gasoline prices in the wake of Hurricane Katrina.

State legislative leaders said they were sympathetic to the plight of Iowa drivers, but it's unlikely they will take any action to suspend or reduce motor fuel taxes - an idea leaders discussed during a price spike in 2000. The per-gallon taxes, used to pay for road construction, are 20.7 cents for regular gasoline, 19 cents for ethanol-blended gasoline and 22.5 cents for diesel fuel. …

… Iowa House Speaker Christopher Rants, a Sioux City Republican, said Wednesday that the difficulty with temporarily reducing state fuel taxes is that there would be no guarantee when gas costs would decline. A lengthy suspension of state fuel taxes could stall many road projects, including the reconstruction of Interstate Highway 235 in the Des Moines area, he said.

"I drive back and forth between Sioux City and Des Moines, and believe me, nobody understands fuel prices better than I do," Rants said. "But you just cannot deplete your road construction fund, because then you have the impact of laying off a whole lot of people who are out there doing work," Rants said.

Iowa Senate Democratic leader Michael Gronstal of Council Bluffs expressed similar concerns about suspending fuel taxes.

"It is something we are willing to look at, but it would have some significant downsides," Gronstal said. "If we do something like that, we want to be cautious about it." …

The story had minor traction. It was picked up in the Mason City Globe Gazette and a majority of the TV news markets gave it a quick bleep in their Katrina/donate/gas prices coverage.

Today, Friday, the news coverage is all facts and hand wringing. How much will gas prices go up? How long will the prices stay there? And when are things, like oil refineries and pipelines, going to get back up and running? All are good questions with no solid answers.

A little context on just why the politically tone deaf Mark Wandro spilled the beans on the need to look at increasing the gas tax. It’s time.

In 2001, the legislature passed a law that shifted motor fuel taxes around using a formula to increase the level of tax on regular gasoline while holding ethanol blends constant. Each year regular gas has moved up by two tenths of a penny. The last increase just kicked in on July 1st and we now pay 20.7 cents a gallon, up from 20.5 cents a gallon in June, while we pay just 19 cents a gallon for ethanol. This tax mechanism ends July of 2007. So, the big boyz over at AGC, our road builders, are going to spend time at the legislature talking about increasing the motor fuel taxes for the road fund. It’s good, if you’re a general contractor and want/need money, but it’s bad, if you happen to drive long distances to your job.

Prior to Katrina, the gas tax policy solution was probably straight forward – renew the gasoline tax scheme at the same rate or a little higher if the AGC boyz help to push a new distribution formula for the road fund. No harm, no foul. Katrina changed everything. Now, with unpredictable motor fuel prices and the sickening realization of how much the Gulf Coast is going to require of us all (1000s of volunteers and 10.5 billion & counting), there is no sure thing. It certainly changes up the dynamics for Iowa pols, as they'll feel pressured to respond politically to rising fuel prices.

A couple things – First, the dramatic increases in the cost of an essential commodity, like gasoline, can quickly influence discretionary spending. People aren’t going to put $70 into the gas tank and then go blow another $70 at the mall. If they’re smart, they're not even going to the mall. The Opinion Journal’s econblogs dives in on this topic with a live blogging conversation by two econ heavy hitters. Their assessment – the consumer is tapped out and the spike in gas prices and other commodities will quickly end the spending spree. Moreover, gasoline prices, and by default the tax on gas, places a much heavier burden on folks with lower incomes. It’s standard marginal utility of an extra dollar stuff; the number of dollars you have affects how much you value each additional dollar. This suggests, and economists agree, gas taxes tend to be regressive.

The point -- as the cost of fuel goes up, regardless if the fuel tax stays the same; it becomes a significant hardship for people on the economic margin and starts to tweak the bankcards of everyone in the middle. And politicians know that when events stress people in the middle, they need to respond. There are any number of policy concepts to consider, tax credits, the temporary suspension of fuel taxes, whatever, it just needs some serious consideration from our serious politicians.

* The Des Moines Register direct link, noted below, seems problematic. If it doesn't work, go to the site map page and click on state government.

People tend to repeat this "the gas tax is regressive" thing without even looking at the papers they cite. For instance, yours says:

"We find that the gas tax is regressive, but that returning the revenue through a lump-sum transfer more than offsets this, yielding a net increase in progressivity."

This implies that EVEN THE GUYS WHO THINK IT'S REGRESSIVE think it's LESS regressive than the other tax alternatives. Many others say it isn't regressive across the board (see my article at

You assume that there is a "lump sum" return to the gas taxpayer. Not. We are unaware, and you can enlighten us if we're wrong, of any state that provides some sort of credit, etc for low-income folks when it comes to the gas tax.

In fact, much of your blogging on the topic spends a little too much time on the urban poor, in complete disregard to the rural poor. If you would bother to expand your assumptions, you might find that low-income rural residents suffer the most under this tax.

Nice try dude.
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