In February, gas prices in the Twin Cities hit their lowest level since May 2021. In April, as Figure 1 shows, they hit their highest level since September 2023. This 35% jump in gas prices was the biggest in a two-month period since at least January 2018.
Figure 1
The same thing is being seen across the state and is squeezing Minnesotan’s budgets. The impact is bigger the lower your income since gas costs what it costs whether you are a low, average, or high-income earner; it takes a bigger bite out of a smaller income.
What, if anything, can policymakers do about this?
To answer this question, we must first ask what is causing this spike. It is clear that the main reason for this spike in gasoline prices is supply disruptions resulting from the conflict between the United States, Israel, and their Gulf allies, and Iran, which has affected oil shipments through the Gulf of Hormuz.
There isn’t much that policymakers in St. Paul can do about that.
It is important to remember that the price isn’t the problem, it is a symptom of the real, underlying problem, which is the aforementioned supply disruptions and their relationship with the demand for gasoline. Often, when policymakers cannot treat the real, underlying problem they will treat the symptom.
Proposals for a gas tax “holiday” are an example of this. Here, Minnesota’s state government would simply suspend the state gas tax of 32 cents a gallon for some period with the aim of lowering the price residents pay at the pump by those 32 cents a gallon. KSTP reported last week that:
…three states are suspending or reducing gas taxes.
Georgia announced it was suspending its state excise tax from March 20 to May 19 — the savings? About 33 cents a gallon.
As of Thursday, Indiana’s governor has extended the state gas tax holiday by 30 days.
The extension suspends both the 7% gasoline usage tax and the 36-cent gasoline excise tax, providing roughly 59-cent savings per gallon.
Utah has reduced its state gas tax by 15%, from July 1 to Dec. 31, a savings of about 32 cents per gallon.
There is a proposal for Minnesota to follow suit:
Rep. Drew Roach, R-Livingston, has a gasoline-related initiative that would require the amount of gas tax to be displayed on sales receipts.
He says he likes the concept of a gas tax holiday, but also notes the issue can be an economic tug-of-war.
“I think it’s nice, it gives a little relief for Minnesotans to get a little tax break,” Roach explains. “You know you typically have one side of the aisle that wants to raise revenues, which is to raise taxes, and the other side is trying to cut taxes.”
How much relief would this bring?
Academic studies suggest that producers pass through around 80% of the gas tax. This means that if Minnesota suspended its 32 cent per gallon gas tax, prices for consumers at the pump might only fall 26 cents because producers pocket the other 6 cents. This might not sound like nothing, especially to those on lower incomes, but it would cut April’s price in the Twin Cities — $3.84 — by just 7%, leaving it higher than any month since October 2023.
And there is a cost to this.
State gas tax revenues are constitutionally mandated for use in the ‘Highway User Tax Distribution Fund,’ estimated at about $1 billion for this year. While this might render the entire discussion moot, it raises the important point that such revenues are part of how the state finances the construction and upkeep of roads. The Tax Foundation estimates that Minnesota covers just 41% of its state and local spending with state and local road use taxes, a share lower than in 42 out of 50 states. If anything, this ratio should be higher, and a gas tax holiday will move us in the other direction.
A gas tax holiday might bring some relief to Minnesotans at the pump, but only at a cost; there is no such thing as a free lunch, as a great man once said. More importantly, it only treats the symptom of the problem, the price, and not the problem itself, the mismatch of supply of and demand for gasoline.