Tax Relief

Florida Gasoline Tax: DeSantis Gasoline Tax Reduction Proposal

Florida Governor Ron DeSantis (R) knows how to make a splash, and his proposal to temporarily suspend the state’s gas tax, but without a specific end date, will only polish that reputation. Citing rising gas prices and the state’s sizeable revenue surplus, the governor is calling on lawmakers to cut the state’s gas tax from 26.5 cents per gallon to zero and keep it at zero while the additional revenue is there, to wear it.

Florida currently has a common “problem” shared by many states: skyrocketing tax revenues and uncertainty about how best to return some of the surplus to taxpayers. This is a good but annoying problem, especially when state officials have doubts about the durability of new revenue. Lowering taxes, even temporarily, puts more money in people’s pockets, which has economic benefits (and is desirable in and of itself), but it is not conducive to growth like lasting interest rate cuts or meaningful structural reforms.

While DeSantis’ most prominent potential Democratic opponent – former Governor Charlie Crist (D), who previously ruled the state as a Republican – has criticized the proposed $ 1 billion tax cut, he criticizes the fact that it did so in a special session this year should have been treated. In 2022, Florida voters could choose between two gubernatorial candidates who believe the reasonable gas tax rate is zero – and in fact, it could be the new rate by then.

Whatever the political reasons behind the proposal, there is another reason both candidates agree with this idea: lowering the gas tax burden is good policy. Political candidates are considered contactless because they don’t know the price of a gallon of milk, but even consumers who buy milk regularly may not notice every price fluctuation, while every motorist can tell you how much gasoline prices have increased in their area. It literally shines everywhere you turn, and with the average driver buying over 650 gallons of fuel each year, the high prices at the pump take their toll.

Public finance students, however, tend not to share this popular craze for lower – or no – gas taxes, because they rightly view the fuel tax as one of the better examples of a consumer-payable excise tax that is the amount you pay , is at least roughly equivalent to the state benefits received. Most government gas taxes are already underestimated to fully cover government infrastructure costs, but the abolition of the gas tax is a massive subsidy for motorists as it shifts road construction and maintenance costs into tax revenues that ignore taxpayers’ use state infrastructure.

Well-designed excise taxes either create a user charging system or internalize a significant externality, or both. In theory, the gas tax has the potential to do both, as it could envision (1) covering the cost of road use (user fee) as well as (2) pricing the contributions to road congestion and (3) having drivers bear the social Cost of emissions and other environmental damage caused by driving (internal externalities). In practice, however, almost all fuel taxes do not fully cover road spending, and so is Florida, where fuel taxes, tolls, and royalties combined make up 79 percent of the amount needed to fund the state’s highway spending. Thus, while the gas tax can play some role in moving people to more fuel-efficient vehicles, consolidating journeys or switching to other modes of transport, its main role is clearly a user charge.

At least as long as there is no zero cent per gallon.

But Florida’s surprise proposal for a lengthy gas tax exemption is just one of the more blatant examples of the broader challenges faced by states in figuring out what to do with overcrowded coffers. There is good reason to believe that most states are on a sustained revenue growth path so that at least some of this new revenue can be used for permanent tax breaks. But it is also the case that the federal states are particularly rampant right now, borne by one-off payments in the form of flexible federal aid and by temporary trends that result from economic activity and federal policy during the pandemic. As some states experience temporary increases in tax revenues, policymakers face difficult choices, even if it is a good problem.

Too often states implement one-off increases irresponsibly and use short-term income for sustained higher spending. While the current economic environment gives most states ample leeway to consider responsible sustainable tax reforms, there are certainly historical examples of states using one-off revenues to implement permanent tax cuts without identifying future compensation payments to offset plans. Prudence requires that one-time money be used for one-time expenses. States therefore have a few options:

  • Put money into reserve funds, such as the state’s Rainy Day Fund.
  • Pay off debt or reduce long-term debt, including replenishing unemployment benefit trust funds and improving the fiscal health of state pension funds.
  • Make one-off investments, whether it’s upgrading DMV computer systems, repairing bridges, running water quality projects, or anything else that has long-term benefits but is not a recurring expense.
  • Covering transition costs related to structural tax reform, providing a buffer in areas where revenue uncertainties or short-term temporary revenue losses could occur.
  • Temporary tax breaks that give taxpayers back part of the surplus without making a long-term commitment.

Temporary tax breaks are not as economically productive as permanent tax reform. Individuals are unlikely to move to a state or work more hours, and companies are unlikely to move, hire additional staff, or expand operations based on tax cuts that are about to expire. (And especially a zero gas tax will not spark any new investment or economic activity.)

The political case for temporary tax relief is simple: taxpayers will take note of a gas tax suspension. The political case, however, is more based on what it anticipates. Even a relatively inefficient method of returning excess tax revenue to taxpayers is preferable to applying short-term revenue increases to new recurring expenses. (Other states have explored refund checks, arguably superior to a gas tax vacation, but Florida already waives individual income tax.) Policymakers unwilling to expand the state size, or at least not go beyond stable revenue streams, understandably pull most of the mechanisms to return the surplus to the taxpayers, the alternative is to create unsustainably higher budget bases.

But these are not the only options.

For those who drive on Florida’s roads it makes sense to bear the cost of maintaining them, so suspending gasoline tax – one of the easiest ways to return taxpayers’ money – is also one of the least economically efficient. But even beyond the specific mechanism, it is better for politicians to use one-off increases in income to make investments that can keep taxes low in the future. That can mean making sure a state’s Rainy Day Fund is adequately funded (to avoid the need for tax increases during a future recession), reducing its unsecured pension liability (which also has future tax implications), or using the revenue buffer to the transition costs of. to compensate for structural tax reform.

Florida doesn’t have a fallback rule in its corporate income tax, but fallback rules are a good example of what it might look like to cover transition costs. Economic analyzes indicate that the repeal of recourse rules does not reduce tax revenue in the long term, but can actually increase it, as business activities previously displaced from the state return to the state. In the short term, however, some businesses that were unable to avoid the tax will see a tax cut that can temporarily reduce government revenues. A temporary increase in sales can fill this gap.

There is also often a certain level of income uncertainty with tax reform. Now is a good time to act as the higher earnings provide a buffer in case the initial predictions differ slightly.

Most states – including Florida – are in a good position to offer permanent tax breaks given their revenue projections. However, if they are justifiably convinced that some of their current higher revenues are permanent and have additional one-off revenues available, they should consider using them either to support meaningful long-term tax reform or for expenses that improve the long-term fiscal one State health. Temporary tax breaks like refund checks or gas tax exemptions aren’t necessarily bad and can be justified as a means of returning excess income to taxpayers, but they often miss an opportunity for taxpayers to get better in the long run.

With that in mind, we’re just an email away when lawmakers across the country are interested in investing some of their future revenue increases in growth-enhancing tax reform and need help pinpointing the best reform opportunities.

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