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Pain in the Gas

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Pain in the Gas

Inflated by taxes and regulations, prices at the pump are higher in Democratic-leaning states. March 18, 2022
Economy, finance, and budgets
Infrastructure and energy
Politics and law

The average price of one gallon of regular gasoline in the United States rose by a dollar, to $3.31, during Joe Biden’s first year in the White House. Now, supercharged by war in Ukraine, the price has soared to $4.27 per gallon. That average, though, is misleading. The actual price of gas at the pump varies widely by state, with nearly a $2-per-gallon difference between the costliest and the least expensive states. While some of those differences have to do with geographic factors that affect distribution costs, state policies—including taxes and regulations—also play a significant role in the vastly different burden consumers face around the country.

The highest gas prices are found disproportionately in high-tax, heavily regulated Democratic states, while the lowest gas prices show up in so-called red or purple states. California leads the way at a whopping $5.78 per gallon, followed by Nevada, Washington, Oregon, Arizona, Illinois, Connecticut, and New York among the lower 48 states (Hawaiian and Alaskan geography make any comparisons with the rest of the country difficult). At the bottom sits Kansas, at $3.81 per gallon, followed by Missouri, Oklahoma, Arkansas, Nebraska, North Dakota, and Iowa.

The price of a barrel of oil accounts for about 56 percent of the cost of this gas. Taxes on average compose about 15 percent of the price, and distribution and marketing costs amount to the rest. State gas taxes are an obvious culprit, but extraordinary fuel standards beyond the national level force up prices, too—as do regulatory constraints on building pipelines and refineries, which inflate distribution costs.

California accomplishes a petroleum hat trick: it hits consumers with high taxes, expensive fuel standards, and regulatory barriers to energy infrastructure. The Golden State has the nation’s second-highest gas tax, at $0.53 per gallon (behind only Pennsylvania, which sneakily assesses its $0.58-per-gallon tax on distributors, who then pass it on to consumers). Filling out the top ten highest-taxed states are Washington, New Jersey, New York, Illinois, Ohio, Maryland, North Carolina, and Oregon. At the bottom are Virginia, Missouri, Mississippi, New Mexico, Arizona, Oklahoma, and Texas. The average tax among those states is just $0.18 per gallon. The difference in taxes alone between the lowest- and highest-taxed states can add more than $5 to the fill-up cost of a 14-gallon tank.

Gas levies are known as “dedicated” or “user” taxes, because in most places governments impose them for the express purpose of financing the infrastructure—roads and bridges—that vehicles use. But as is so often the case, the payoff for increasingly higher taxes is minimal. Indeed, some places with the highest gas levies have among the worst roads. The Reason Foundation’s annual highway report measures the amount of money that states collect from residents for highways and compares that with the performance of the state’s highway systems, including the conditions of its roads. The states that deliver the least bang for consumers’ gas-tax dollars are New Jersey, Rhode Island, Alaska, Hawaii, New York, California, Delaware, Massachusetts, Washington, Florida, and Illinois. By contrast, some of the lowest-taxed states—North Dakota, Virginia, Missouri, Kentucky, North Carolina, Utah, and Kansas—deliver some of the best infrastructure at reasonable costs for their residents.

One problem is that the higher the gas levy, the more likely some governments are to snatch the revenues away and use them for other purposes beyond roads. A 2020 Reason Foundation study found that 22 states divert funds away from expenses related to roads. The top five states in this category—led by New York and New Jersey—swipe about one-third of their gas-tax money for other purposes. Albany is notorious for using gas tax money to finance salaries and benefits for workers in the Department of Transportation, whose wages in other states are funded by general budget money. New York also uses gas-tax money to repay bonds floated years ago, financing debt for old projects rather than new building. As a result, the state’s comptroller has written, the state’s gas-tax-financed roads and bridges fund “no longer serves its original purpose of assuring reliable, predictable investment in the future of the State’s transportation infrastructure.” New Jersey, meantime, spends a chunk of its increasingly hefty, inflation-adjusted gas tax on alternate transportation methods, including building bike paths and subsidizing underused light rail lines. Connecticut funnels about $1.1 million annually from its gas tax to Temporary Assistance for Needy Families—that is, welfare.

High taxes are often accompanied by heavy regulations that drive up prices further. The latest trend among states is to demand a so-called low-carbon fuel standard at the pump, which reduces the carbon intensity of gas below federal standards but comes at a greater cost. California implemented the first low-carbon standard in 2013, which initially raised prices an estimated $0.12 per gallon. In 2018, the state began phasing in more stringent standards, which will raise the price of a gallon of gas by $0.36 per gallon by 2030, according to projections of the California Air Resources Board. Oregon has passed a similar program, which may eventually cost consumers $0.17 per gallon. Washington, New Mexico, and Colorado are just some of the other states also considering the more expensive fuel.

Curbs on infrastructure add to the costs. Oil won’t run your car; refineries must convert it to gas. But thanks to extreme regulations, the U.S. has built few new refineries over the last 50 years, so gas must be transported great distances to reach some consumers. Pipelines do that efficiently, but many states and the federal government have curtailed those, too. Other kinds of transportation, including trucks, can be more expensive. Few pipelines run through the Rocky Mountains to serve West Coast states, which therefore face the biggest distribution costs and are often described as “fuel islands.”

Of course, California sits on plenty of oil, but the newest refinery in the state was built in 1979, while others are so old that owners are looking to decommission them. A state with its own potential to produce oil and turn it to gas is thus left trucking in supplies at enormous cost. And the situation is unlikely to get better soon: California governor Gavin Newsom said last year that his state should aim to eliminate drilling by 2045. Other states will confront similar challenges, especially if they prohibit or limit the building of pipelines. All of the four new refineries opened in the U.S. in recent years are in Texas, providing a logistical challenge for users in faraway states.

In our federalist system, state policies produce significant variations in the costs of goods and services. But few products are subject to so many state variations that their prices differ around the country by as much as 50 percent, as with gas. The extent to which that extra cost ripples throughout the economy of a region enhances, or detracts from, the competitiveness of a given state. For the average consumer, it’s becoming a question of how much pain he can bear at the pump.

Photo by STEFANI REYNOLDS/AFP via Getty Images

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