Higher gas taxes don’t always mean higher prices

A persistent argument in the ongoing debate over whether to raise Minnesota’s gas tax is that any tax hike would increase prices at a time of spiraling pump prices.

“I hear it all the time — raise the tax and gas prices will go up,” said state Rep. Ron Erhardt, R-Edina, chief House sponsor of legislation to increase Minnesota’s gas tax to help pay down a backlog of transportation improvements.

“It’s a no-brainer, isn’t it?” said state Rep. Mary Liz Holberg, R-Lakeville, an outspoken critic of hiking the gas tax. “Any cost increase [as with a tax] will be passed on.”

Gov. Tim Pawlenty is among the many who have said that raising the gas tax will increase consumer costs.

Pump prices are rising, of course, but would they automatically rise even more with a hike in the tax?

Not necessarily, say pricing experts.

“It’s really hard to tie a gas tax to pump pricing,” said Mary Elge, an editor at the Oil Price Information Service in Wall, N.J., a recognized national authority on fuel pricing. “There are so many variables that go into it, and a state gas tax isn’t a major factor.”

Consider that in 1988, when Minnesota’s gas tax was last raised, the state’s 20-cent levy was 17 percent of the pump price, then about $1.15 per gallon.

However, escalating pump prices (up nearly 50 percent since last fall) have pushed down the total state tax to only about 6.5 percent of the pump price, and that would go up by less than 2 percent if the gas tax were raised a nickel.

And in the broad scheme of gas pricing, a 2 percent bump in costs isn’t a big factor in the pump price to consumers — all of us have stories of 10-cent or 20-cent a gallon price differences between stations spaced only a few miles apart.

The major pricing factor, say the experts, is the heartbeat of American capitalism: supply and demand.

A spot check of gas pump prices averaged by state and the amount each state pays in gas taxes reveals how mixed the pricing situation is.

Eight states that have a higher gas tax than Minnesota’s actually pay the same or less for gas at the pump. Rhode Islanders pay 31 cents a gallon in state taxes, but gas there is a few cents a gallon less than is paid here, according to the AAA.

Seven states have a lower gas tax than Minnesota’s, but pay higher gas prices. Floridians, for example, pay nearly a nickel a gallon less in taxes but about a dime more for gas. Alaska, a major oil producer, taxes gas at only 8 cents while consumers there pay over $3 at the pump.

Fourteen states have a higher gas tax than Minnesota and also have varying higher gas prices.

Regardless, there is little correlation between the amount of a state’s gas tax and how much consumers pay at the pump.

“That’s not surprising,” said Elge. “Supply and demand has always been primary in retail gas pricing. If a refinery goes down, for example, it will affect regional prices, just as increased demand during holidays will be a factor.” All that, coupled with the price of crude oil on the world market, have the effect of muting relatively “small” things like a nickel or dime adjustment in a state gas tax.

Rick Kruger, executive director of the Minnesota Transportation Alliance, said that when he drives to his cabin he’s noticed that gas prices at towns about 10 miles into Wisconsin are sometimes lower than they are along I-35W in Minnesota. Gas in Wisconsin is taxed at 31 cents a gallon, 11 cents higher than in Minnesota.

Erhardt said he’s experienced the same thing when driving across borders.

A spot check of border cities shows a mixed result: North Dakota’s gas tax is 3 cents higher than Minnesota’s, and yet pump prices in Fargo and Grand Forks in North Dakota are the same as in neighboring cities across the Red River in Moorhead and East Grand Forks, Minn. However, gas prices in selected border towns in Wisconsin and Minnesota showed about a dime a gallon more is paid in Wisconsin, which does match up with Wisconsin’s higher tax. But pump prices in Duluth are nearly the same as in Superior, Wis.

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