Terry Mitchell

Do Falling Gas Prices Decrease Tax Revenues?



Posted: Friday, December 05, 2008

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http://commenterry.blogs.com

The other day, I read an article in which the author indicated that one of the problems with falling gas prices is that they decrease the gas tax revenues of the federal government as well as those of state and local governments. Nothing could be further from the truth. Actually, just the opposite would likely be true.

Although obviously a very intelligent person, the author made the all too common mistake of thinking that all that taxes are based on percentages. Most taxes, including the income tax, are. However, gas taxes aren't based on a percentage of anything. If they were, the author would have been correct in his assumption. Instead, they are levied as a fixed amount per gallon, regardless of the price per gallon.

Let's look at some hypothetical examples for comparative purposes. First, let's suppose that gas taxes were expressed as a percentage of the sale and that the rate was 5%. When someone purchased 20 gallons of gas at $4.00 a gallon (as would have been the case this past summer), the total cost of the gas would be $80. Then a tax of $4.00 ($80 x .05) would be added.

Now let's say someone purchased the same 20 gallons at today's average price of close to $1.80. The total cost of the gas would be only $36. That means a tax of only $1.80 ($36 x .05) would be added. The federal, state, or local body doing the taxation would have seen their revenue drop by more than 50% in just a few short months. This would obviously be devastating. But, fortunately, this is simply not how it works.

Now let's jump to the real world where gas taxes are fixed costs per gallon. Let's suppose it is 10 cents per gallon. Using the example of 20 gallons purchased at $4.00 per gallon from above, the total tax would be $2.00 (20 x $0.10). Now, using the example of the 20 gallons purchased at $1.80 per gallon from above, the total tax would be … voila … the same $2.00 (20 x $0.10).

Tax receipts would not drop at all and that's the way it is in reality. Technically, they are unaffected by increases or decreases in the price of gasoline. However, when gas is cheap, people (theoretically) tend to buy more gallons and therefore increase gas tax revenues. When gas prices are more expensive, the opposite is theoretically true.
 
Terry Mitchell is a software engineer, freelance writer, amateur political analyst, and blogger from Virginia, USA. He posts a least one article a day to his blog - http://commenterry.blogs.com - on subjects such as current events, politics, technology, society and culture, religion, health and well-being, self improvement, personal finance, trivia, and sports. Terry is also the owner and operator of a website that is dedicated to allowing U.S. citizens to find all types of insurance at reasonable prices.  
 
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Top-level comments on this article: (1 total)
» left by Jeff Brown
 3 years 50 days ago.
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Terry,
 
OK, got ya on the taxes. What I'm looking for is a clear explanation of why we experience roller coaster prices. I like them coming down (now, almost $3 dollars!) but it's a little scary. It just implies a good bounce back up. I know what can affect the prices, but I have yet to read an explanation amongst all the "could be's" that satisfy understanding.Thanks for the article.
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