May 31, 2011 • Current Events, Perspectives, Travel & Leisure

Fun with gas prices

by Wyatt Taylor

With summer upon us, Americans are once again engaged in a grand old tradition: griping about high gas prices. Our pain at the pump has been acute for the last few months, and it doesn’t seem likely to get better any time soon. Over the holiday weekend, as gas prices spiked, I ran a little demand response program of my own – spending the long weekend in the comfort of my home instead of burning gas on a road trip. In times like these, our political leaders are quick to sell the public on convenient villains, from evil OPEC to those dastardly oil companies. Still, we all know that those who are the first to assign blame usually deserve a bit of it themselves.

Given my background in economics, I tend to think of gas prices as derived from supply and demand forces in the global oil market, with some variations across the regions due to other factors like refining and transportation. That’s why I was startled last week when I saw this map of gas prices by county in the United States from GasBuddy.com.

Gas Prices from GasBuddy.com

Gas Prices from GasBuddy.com

You can see from the map that variation in gas prices tends to follow state lines, rather than flowing across regions. For instance, check out California’s eastern border, where a consumer could save more than $0.30 a gallon by driving across the border from California into Nevada or Arizona. The distinct price differentials between states clearly point to the influence of state policy – specifically tax policy – on gas prices. You won’t hear our political leaders talking about that.

Setting aside the $0.184 / gallon in federal gas tax, state gas taxes explain a good deal of the state-to-state variation in gas prices. In the map above, we see there are four distinctly “red” states, those with particularly high prices: California, Connecticut, Illinois, and New York. Now compare gas tax rates among the states.

Those “red” states rank 1, 4, 5, and 2, respectively, for the highest state gas taxes in the nation. Number 3, by the way, is Hawaii, which is not shown on the map. Conversely, here are the eight especially “green” states, those with low gas prices, with their gas tax rate ranking in parenthesis: Arkansas (34), Louisiana (38), Mississippi (43), New Mexico (44), Oklahoma (46), South Carolina (47), Tennessee (35), and Wyoming (49). As you can see, these states with the lowest gas prices are all in roughly the bottom third of states in gas tax rates. By the way, the cheapest is Alaska, which is also not shown on the price map. To look at it another way, note the difference between California (number 1) and Wyoming (number 49): most of California falls into a red price level of at least $4.07 / gallon while most of Wyoming is at a green price level topping out at $3.67 / gallon. That’s at least a $0.40 / gallon difference. The difference in their state gas taxes: $0.337 / gallon. Californians pay $0.661 / gallon in combined federal and state gas taxes. No wonder Californians are packing up their trucks and abandoning their state – California is a beautiful state, but there’s nothing as beautiful as affordable gasoline.

Now, I understand that there are important uses for gas taxes, like repairing roads and bridges and, presumably, subsidizing alternative-energy sources as part of a broader sustainability strategy. Still, as we feel the pain of higher gas prices, let’s remember that politicians deserve their share of blame.

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