California lawmakers are considering 2 options to help drivers deal with soaring gas prices

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Gas prices in Sacramento
Prices at a gas station in Sacramento on March 10. Photo by Miguel Gutierrez Jr./CalMatters

There’s a collective groan, rippling through California, as drivers drive to gas stations and see prices above $5.

Gas prices per gallon are rising in the United States, but prices in California are skyrocketing higher than in any other state according to the American Automobile Association. Yesterday, the average gasoline price in California was $5.69, down from $4.68 a month ago, while the national average was $4.32.

Much of what has driven gasoline prices up in recent months is beyond the control of California lawmakers: Russia’s invasion of Ukraine and subsequent sanctions have driven prices up, combined to the fact that oil demand has rose from pandemic lows faster than supply.

Gas prices in California tend to be higher than in other states, in part due to higher infrastructure taxes and environmental fees. State legislators increased gas tax 12 cents after an uphill battle in 2017 to pay for roads, bridges, transit projects, and more. Then there’s some rise in gas prices in California that’s harder to explain, which Severin Borentein, an energy economist at UC Berkeley, has dubbed the mystery supplement for gasoline.

But people are feeling the effects of climbing price now, and Democratic and Republican lawmakers say they want to help. One option is to reduce the state tax on gas suppliers, in an effort to reduce prices. Another, which Governor Gavin Newsom teased in his State Address Stateis a form of rebate to help cover the higher cost of gas.

Here’s how each of those proposals would work and what they would mean for Californians.

Option 1: Reduce gas tax

California taxes gasoline before it is sold and uses the money to fund highway improvements and transit projects. Currently, this tax – paid by suppliers – is approximately 51 cents per gallon, making it the second highest in the country, after Pennsylvania tax. It increases a little each year to keep up with inflation. In July, the tax is expected to increase by approximately 3 cents per gallon.

Democratic Gov. Gavin Newsom made a modest proposal in January, before Russia invaded Ukraine: suspend the increase for a year. In other words, don’t let the tax go up 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 “won’t have an effect that anyone will notice,” said Borenstein, the Berkeley economist. Drivers probably wouldn’t notice, but the people managing the state’s infrastructure budgets probably would: The plan would cost the state about $523 million in lost revenue. This would mainly end up affecting the financing of national highway projects in a few years, according to Office of the Legislative Analyst analysis.

Leaders of the majority Democratic Legislature, whom Newsom would need to buy into his plan, aren’t crazy about the idea, saying “our goal can’t be a small gas tax cut that might not be passed on to consumers. ”

California Republicans have proposed scrapping the entire 51-cent short-term tax. Last year, Republican state senators proposed to completely suspend the tax for a year; this year, Granite Bay Republican Kevin Kiley proposed to abolish the tax for six months. The six-month proposal would cost the state between $4 billion and $4.5 billion in lost revenue, according to estimates from Assemblyman Kiley’s office. In either case, the tax money lost to infrastructure would be offset by a one-time injection of other public funds into the infrastructure accounts.

“The gas tax is something we control as state legislators and it’s a lever through which we can offer some relief to California taxpayers,” Kiley said. It would be impossible for a Republican to push a bill through the Democratic-controlled Legislature without significant Democratic support; so far a a few Democrats have expressed interest in the proposal.

But because the tax applies to gas suppliers, the price of gas would only come down if gas sellers actually passed the savings on to consumers by reducing the price of gas. And there is no guarantee on the amount of savings they would pass on.

In February, economists from the Office of the Nonpartisan Legislative Analyst reviewed research on how fuel tax changes affect fuel prices, said Seth Kerstein, an economist at the agency. They estimated that between two-thirds and 100% of the Governor’s proposal – or 2 to 3 cents per gallon – would likely be passed on to people paying at the pump.

If that same estimated range applies to Republicans’ larger tax relief — which the agency did not analyze — that would translate to about 34 to 51 cents per gallon in savings at the pump. Generally, economic theory would say that larger tax changes would be passed on the same way as smaller ones, said UC Davis energy economist James Bushnell. But gas tax changes are also typically well below 51 cents, so research has focused on the impacts of smaller changes, he said.

This was before Russia invaded Ukraine and subsequent sanctions against Russian companies and gas disrupted the international gas market.

Gasoline tax breaks “come up every time there’s some kind of oil shock,” Bushnell said. “And now is the absolute worst time to reduce those taxes if the goal is to relieve customer prices.” Gas sellers are less likely to pass on all savings to customers when gas supplies are limited. In other words, as the war affects gas supply, a reduction in the gas tax could mean more profits for gas sellers and less reduction in price.

In addition to this, California may have a less competitive market for gas distribution and retail than other states, found Borenstein, the Berkeley economist. Much more gasoline in California “passes through stations that are either refiner-owned or have long-term contracts that give refiners significant control over gasoline prices,” he wrote. This could make it even more likely that sellers will pocket some of the savings from gas tax relief for themselves.

In addition to questioning how much tax relief would actually save consumers, Borenstein said reducing or eliminating the gas tax would be bad policy.

“We need gasoline prices to reflect the real costs to society,” Borenstein said, referring to the negative effects of greenhouse gas emissions, air pollution, as well as the costs cars hitting other cars, bikers or pedestrians. When you add up all these costs, gasoline taxes are actually too lowhe writes in an analysis of the governor’s proposal.

Option 2: send tax refunds to drivers

During his State Address State On Tuesday, Newsom unveiled another idea to help Californians cope with high gas prices. Or, at least, the germ of an idea.

“I will be submitting a proposal to put money back in the pockets of Californians to deal with rising gas prices,” he said. The proposal will be a tax refund and will give billions of dollars to Californians, a spokesperson for the governor said, although it is not yet clear who exactly will receive the money and how much they will receive.

The money can be tied to owning a state-registered car, said Dee Dee Myers, Newsom’s economic adviser. People who have switched to other modes of transport to reduce their carbon footprint are not Savage on that idea.

It might also end up looking like stimulus checks sent to California last year, said Chris Hoene, executive director of the California Budget and Policy Center. If the latest stimulus program is any indicator, the state could send checks a few months after lawmakers reach an agreement, Hoene said.

Funding could come from state estimates Surplus of $21 billion. But there are a lot of “ifs” and “maybes” because most of the details have yet to be ironed out with lawmakers.

This proposal would also ensure that money intended to reach Californians actually does, said Bushnell, the UC Davis economist.

Sending everyone checks — if lawmakers go that route — would also be more economically fair than lowering the price of gas, Borenstein said. The richest consume more energy than the poorest on average, so lowering the price of gasoline would help them more. If lawmakers send checks, they could choose who gets how much.

A rebate could also help Californians with other rising costs, like rent and electricity. For most people, these other costs actually make a bigger dent in their bank accounts than gas, Borenstein said, but they’re not as publicly visible.

As the United States turns away from Russian oil, there is a fundamental reality that we will have to settle for 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 around the corner. “I think they’re heading up before they come down.”

Cal Matters is a public interest journalism company committed to explaining how the California State Capitol works and why it matters.

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