New Jersey State Policy Lab: Lowering Tax Rates on Motor Fuels: A Bad Idea That’s Gaining Momentum

April 14, 2022

By Michael L. Lahr, Rutgers Economic Advisory Service (R/Econ™) for New Jersey State Policy Lab

Policymakers’ hearts are in the right place. Presently, the United Kingdom and a few U.S. states are enabling at least a temporary reprieve from fuel taxes in the name of solidarity against Russian aggression.[1] In the face of budget surpluses and soaring energy prices, it would seem that consoling consumers in this manner is more than just a patriotic duty for legislators. But the concept is wrong-headed, let me count the ways.

First of all, it only enables our reliance on fossil fuels. Worse, such a tax cut is a negative incentive to weaning us away from them. The cuts essentially encourage consumers to buy motor fuel.

Second, zeroing out fuel taxes would undoubtedly help producers of crude oil as much, if not more so, than consumers. While we can be sure that price rises will pass through to consumers, there is nothing that guarantees that price drops will similarly be transferred to consumers. But if it does, a price drop could exacerbate the current demand-supply gap. That is, reducing taxes on fuels could spur demand further, and in turn, escalate prices even further.

Third, just as we should be diminishing our reliance on foreign crude oil—in particular, that from Russia—this policy conceptually urges our nation to import more. That is, in essence, while we are proclaiming that we politically support Ukraine, this sort of policy essentially has us sneaking through the back door to support Russia economically.

Fourth, in New Jersey, we have two fuel-related taxes, the Petroleum Products Gross Receipts Tax (PPRG, 31.9 cents per gallon) and the Motor Fuels Tax (10.5 cents/gallon for gasoline and 13.5 cents for diesel fuel). All of revenues derived from these taxes are constitutionally dedicated to the New Jersey Transportation Trust Fund Authority. This means we would lose state revenues that are specifically targeted for transportation purposes—building and repairing roads and improving transit. In this way, fuel taxes make particular sense as they conform to a user-pays principle. Losing these funds suggests that our roadways would deteriorate, and I, for one, am no fan of driving through potholes.

Fifth, it supports gas guzzlers and does nothing for people who have no vehicle. If we think of fuel taxes as a fee for road use, there should be no reason to reduce them. Moreover, reducing them does little to support the poorest in our society, yet rewards people who didn’t make the best of decisions when purchasing their last vehicle. Since 1979, we have been warned again and again that peak oil was coming.[2] So, why are we still driving vehicles that get less than 20 miles per gallon? Unfortunately, more than a third of Americans believe vehicles powered by motor fuels only are better than the alternatives.[3] High fuel costs (and, hence, fuel taxes) lead people to switch to public transportation and vehicles that use alternative fuels (i.e., hybrid or electric), this conversion, in turn, reduces carbon emissions. And there are ways for drivers of vehicles with internal combustion engines to cut fuel costs; Another New Jersey State Policy Lab brief[4] suggests we should be “increasing telecommuting (or working at home); reducing speeds, or otherwise encourage ‘eco-driving,’ such as reducing hard accelerations, idling, and other inefficient driving practices.”

Sixth, if policymakers want to give voters some relief from rising energy prices, they could do so more fairly by using a policy that also covers home energy use in addition to motor fuel use. This is because the two comprise nearly equal shares of household spending (3.3% and 3.8%, respectively) and tend to rise together. If New Jersey legislators are willing to forgive the full 42 cents per gallon in state taxes affiliated with motor fuels, it would be more effective to forgive it via an income tax rebate to all consumers. If we assume the average consumer uses 10 gallons of gas per week, this would mean writing a rebate check in the amount of little more than $218 (10×52×[42/100]) to each household that submitted an income tax form. Businesses, of course, would pass the higher energy costs on to their customers.

Seventh, if, instead, we are actually worried about national energy security, i.e., the use of imported crude oil, the U.S. Congressional Budget Office has created a laundry list of effective ways to assure it.[5] And adjusting fuel taxes is not on that list. Reducing consumption is at the top of the list. Other potential policies on the list that legislators could encourage are:

  • Release oil from the Strategic Petroleum Reserve;
  • Facilitate development of insurance markets that protect consumers against energy price rises;
  • Develop alternative fuels that substitute for oil;
  • Promote alternatives to personal vehicles; and
  • Develop vehicles that use alternative fuels.

[1] The Economist. (2022). “When Duty Falls,” March 26. Available online on March 28 at https://www.economist.com/leaders/2022/03/26/cutting-fuel-taxes-is-a-bad-idea

Heyward, Giulia. (2022) “Some States Suspend Their Gas Taxes, Looking to Ease Pain at the Pump,” The New York Times, March 27. Available online on March 28 at https://www.nytimes.com/2022/03/27/us/gas-tax-cuts.html

[2] Storrow, Benjamin. (2022). “Will the Russian Invasion Accelerate Peak Oil?,” Scientific American, March 4. Available online on March 28 at https://www.scientificamerican.com/article/will-the-russian-invasion-accelerate-peak-oil/

[3] Barns, Adam. (2022). “Over One Third of Americans Say Gas Cars Better Investments Than Alternative Fuel Vehicles,” The Hill: Changing America, March 25. Available online on March 28 at https://thehill.com/changing-america/sustainability/energy/599802-over-one-third-of-americans-say-gas-cars-better

[4] Noland Robert B. and Lewis Fulton. (2022). “Now is the Time to Save Oil in a Hurry,” New Jersey State Policy Lab, March 14. Available online on March 28 at https://policylab.rutgers.edu/now-is-the-time-to-save-oil-in-a-hurry/

[5] Stocking, Andrew. (2012). Energy Security in the United States. A report by the Congress of the United States, Congressional Budget Office. May. Available online on March 28 at https://www.energy.gov/ceser/energy-security

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