Rising Gas Prices Could Decrease Tax Revenues

While soaring gasoline prices are now producing increased sales tax revenue for state and local governments, officials said Wednesday they are worried that overall tax collections could slump dramatically if prices keep rising and start discouraging consumption.

Keeping a particularly close eye on gasoline prices is the California Transportation Commission, which has the most to lose if consumers are jolted with higher and higher fuel costs. Highway construction projects are financed primarily by the state’s 14-cent-a-gallon gasoline tax.

“In the near term it (the gasoline price increase) really has an insignificant effect,” said Caltrans spokesman Jim Drago. “If it lasts for an extended period, then over the long term there could be a significant impact on the ability of Caltrans to meet the state’s 10-year funding commitment.”

In June, California voters endorsed a phased-in 9-cent-a-gallon hike in the gasoline tax to help finance what officials said would be a 10-year, $18.5-billion transportation improvement program. Five cents of the tax increase went into effect Aug. 1.

In addition to the 14-cent-per-gallon gasoline excise tax, consumers also pay a sales tax on gasoline ranging from 6 1/4% to 7 1/4% depending on local levies. Delena Bratton, tax service specialist for the State Board of Equalization, said there is a $10-million-per-year increase in sales tax revenue for every penny that gasoline prices rise.

But she cautioned that this increase is usually offset somewhat by other factors and, if price hikes continue so that consumption drops, the state may actually see a decline in tax revenues.

“The theory is that a family has limited discretionary funds and if they are spending additional money on gasoline then they have less money to spend on other taxable items like dining out, clothes or equipment,” she said.

Lonnie Mathis, the state Department of Finance’s head of revenue forecasting, said consumer gasoline buying habits seem to be affected much more if there is a sudden dramatic hike in prices than if the increase is gradual.

Mathis said the general rule of thumb is that gas consumption drops 1% for every 10% jump in prices. He said that consumption dropped about 10% when prices nearly doubled more than a decade ago.

So far, Mathis said, tax revenues appear to have remained stable. He said there may have been a slight increase in sales tax revenues from gasoline price hikes, but he said that increase is minimal.