Rising gas prices caused by the U.S. war with Iran have caused a significant bump in the national inflation rate. A number of stopgap policy proposals have come up to ease the pain at the pump. It’s questionable whether those ideas really matter.
President Trump has proposed a federal gas tax holiday. That would halt collection of more than 18 cents per gallon of gasoline and 24 cents on a gallon of diesel. Illinois Republicans like state Sen. Sally Turner of Beason offered up a state sales tax holiday on gasoline. That's about 6 cents per gallon.
“If we took that away just for a period of time even, that would have been a big help to individuals being able to pour gas in their tanks and going back and forth to work,” said Turner.
Counting pennies
Congress hasn't passed the federal gas tax holiday. The General Assembly did not act on the GOP proposal. Instead, Gov. JB Pritzker backed a measure forgoing about a penny by not taking a planned increase in motor fuel tax for the next six months.
“We paused the gas tax inflator as well,” said Pritzker in a social media post about everything state government has done to help the little guy.
On a vehicle with a 15-gallon tank, that amounts to about 15 cents. Not so much. And it is not actually a savings at all.
By the way, the GOP proposal to pause the sales tax on gasoline would be less than a buck off on a fill up. Everyday motorists aren’t likely to see much effect, unless they drive a tremendous amount.
“No. I think this is actually trivial,” said economist Mike Doherty of Normal.
Doherty said it looks to him like a purely political proposal, although the optics of it could be useful as a campaign issue on either side of what has happened.
The state motor fuel tax, as opposed to the sales tax on gas, is about 48 cents per gallon. There's been no serious push for a hiatus on the motor fuel tax. If there was it would save less than eight dollars per fill up on that standard tank.
Year-round E15
One more idea would be to piggyback on what farm interests have wanted for years, to make the winter blend of E15 fuel that has 5% more ethanol in it available year round.
Illinois Corngrowers Association President Mark Bunselmeyer said E15 is 10 to 30 cents cheaper than regular unleaded. Illinois has a year-round E15 waiver as a test case. Right now, he said it's about 15 cents per gallon less than regular at a station near him in Decatur. Bunselmeyer said if gas prices keep going up and stay that way there could be a stronger impact from E15.
"Ethanol and gasoline are both traded on the Board of Trade and there’s almost a $2 difference a gallon on pure ethanol versus gasoline. Depending on the margins between those two, the retailer or the blender could easily make that a higher change if we do have growing prices in oil,” said Bunselmeyer.
Farm groups project an initial 200 million bushel increase in the market for corn and up to 15 times that if E15 were widely adopted: three billion bushels of additional demand for corn.
There are a couple of challenges to E15. Congress hasn't approved it yet. If it does, Bunselmeyer said the infrastructure to sell it is not yet widely available.
"Somewhere around 1.5% of stations have that E15. And so it’s a growing game of adding in that infrastructure,” said Bunselmeyer.
There are Agriculture Department grants for retailer upgrades to install pumps and tanks for E15 at gas stations, but again, that's not quick.
“Growth initially is not going to be exponential. It’s going to be kind of a slow grind,” said Bunselmeyer.
The math isn't mathing
As a thought experiment, if you add up all the ideas to rein in gas prices — state sales tax, state gas tax, federal gas tax and E15 — you still don't neutralize the 44% increase in gasoline and diesel prices since the war with Iran began. Economist Mike Doherty said a lot of data show you're not going to get all of it back anyway. Doherty said if a cost comes off the top, and taxes are an added cost, the price decline is not one-to-one. Relief is typically only 70%-80% of the past increase.
“We don’t know how much retailers are going to view this sudden exemption from paying this tax as an opportunity to say, ‘Hey, we can put some money ahead. We could pay off some other things that we haven’t been able to do because we’ve been raising prices so high everybody has been screaming at us to keep our prices as low as possible. Now we have an opportunity to make up for that,’” said Doherty.
It’s not just fuel. Doherty said he’s seen this happen in agricultural commodities as well.
“It gets distributed up and down the supply chain when they suddenly exempt some piece of the supply chain from a tax," said Doherty.
There's also a downside to gas tax relief measures.
“We’d have to look at cutting some services or some activities to do that. We go for a balanced budget. Taxes pay for services,” said Mayor Chris Koos of Normal.
Bloomington Mayor Dan Brady said gas taxes pay to fix what cars and trucks that weather destroy.
"We have, obviously, those funds directed to what they’re supposed to go to, which is infrastructure and roads,” said Brady.
You don't actually save anything because you will still have to repair the roads eventually. And deferring maintenance, Mike Doherty said, might cost more in the long run because further deterioration makes it more expensive to fix.
“This money went somewhere. This money maintained our highways. Now, you’re not going to have that money to maintain our highways and in fact, the highway trust fund is going to run out of money that much earlier,” said Doherty.
In fact, trucking and industry trade groups are against a gas tax holiday, Doherty said, because they view the highway trust fund as useful.
President Trump and Iran’s lead negotiator have signed an agreement that is expected to open the Strait of Hormuz. Specific terms have not been released, and the countries have shoved off big disagreements until later negotiations.
President Trump said a few weeks ago motorists can expect some relief.
"As soon as it's over you're going to see gasoline and oil drop like a rock, 'gonna be dropping like a rock," said Trump in a news conference.
Not so fast as that, according to Illinois State University economist Oz Dincer.
“When the war stops, we’re not going to see the positive impacts soon. It’s going to slowly die down,” said Dincer.
Won’t market pressures force prices down? In a perfect world of competition, yes, but the marketplace is not perfect. Dincer said fuel is one area people can’t really be picky.
"Demand is not elastic. Even if the price of gasoline goes up a lot, for instance, our consumption does not go down as much because we do need it,” said Dincer.
Most of the core inflation rate increase is due to the increase in fuel prices, he said. It's similar to what happens when you lift a tax.
“Because of that the suppliers have control over prices so they’re not gonna let the prices go down. They’re going to keep part of that reduction themselves,” said Dincer.
Dincer said state and federal lawmakers don’t have any policy tools at their disposal that would make a meaningful difference.
“I don’t really see any. If you are talking about price controls, we should completely forget about those things. They never work, and if you leave it to the market forces it always takes time,” said Dincer.
The time it will take for these oil and gas price increases to subside will be longer. President Trump acknowledged there are mines in the Strait of Hormuz that someone will need to remove.
Dincer said markets like predictability, and they will stay volatile while there is uncertainty. Shippers will have to have to trust that the strait is really and truly safe to move through before markets will adjust themselves.
