While TaxVox and others have disclosed the folly of a federal tax holiday, some have suggested that temporary state gas tax relief might work better. Some New York State legislators are already pushing for such a plan. But before cash-strapped states jump on the bandwagon, they might consider how a previous experiment in Illinois and Indiana worked out. In 2000, Indiana announced that it would be suspending its 5 percent gasoline sales tax for 120 days beginning July 1. In response, Illinois also suspended its levy for six months that July.. Quaint as it seems today, the changes were spurred by a spring spike in Midwest gas prices to (gasp) $2.00 – a level drivers would now gladly embrace. 

According to an article by Doyle and Samphantharak published in the Journal of Public Economics,  between 60 and 70 percent of the 5% gasoline sales tax cut was passed on to consumers, while 80-100 percent of the reinstatement of the tax was passed on– albeit at a time when prices had already dropped.  (The original spike in prices was caused by temporary limits on supply.) Thus, it appears that drivers got some, but not all, of the benefits but paid for the tax reinstatement.  They also found somewhat smaller pass-through effects near the state borders. An earlier study released in 2001 by Michael Martin of the American Road and Transportation Association found that about half the tax change was passed through to consumers. .

What did it all mean for tax revenues at a time when, like today, states are facing budget shortfalls?  The Indiana and Illinois moratoriums were estimated to have cost the states $46 million and $157 million, respectively, while according to Martin, the average motorist saved about the cost of a half-a-tank in Indiana or a full tank in Illinois, or about $10 or $20 per motorist. Given that money was cut from infrastructure projects and eventually had to be made up from other taxes, this seems like a dubious trade-off.

Despite this less-then-stellar windfall for drivers, the Illinois and Indiana tax changes probably passed along more savings than a current state holiday would because the temporary nature of the supply constraints in the Midwest market at the time might not apply today either there or in other states. Any new pressure on prices caused by the increase in demand from specific state tax cuts would be spread across regional gasoline supplies, causing prices to fall in the state with the tax holiday and rise in neighboring states.  In contrast, with national refineries  running at or close to capacity,  a nationwide tax cut would not bring forth additional supplies, so state holidays are more effective at reducing gas prices within a state than a federal moratorium would be in reducing national gas prices. 

Bottom line: The states’ tax holiday didn’t do much more for consumers than the fed’s would. If motorists want to save money on gas, they’d be a lot better off driving less, or slowing down.