Amid Spiking Gas Prices, Biden & California Democrats Propose Tax Hikes On Energy Suppliers

High gas prices have prompted governors across the country, in both red and blue states, to introduce bills that temporarily cut state gas taxes or delay scheduled increases. Maryland and Georgia were the first states to enact temporary gas tax cuts and more are likely to follow suit. In California, home to the nation’s highest average gas price, Governor Gavin Newsom (D) has proposed sending rebate checks to Californians to help cover heightened fuel costs.

As an alternative to Governor Newsom’s proposed rebates, California Assembly Kevin Kiley (R) introduced Assembly Bill 1638, legislation to temporarily suspend the state gas tax. During a March 28 committee hearing on Assemblyman Kiley’s proposal, members of the Democratic majority gutted Kiley’s bill and replaced it with legislative language that would instead impose a tax hike on gas suppliers. As home to what is already the nation’s highest marginal income tax rate, highest sales tax, and one of the most overall burdensome tax codes in the country, the decision by Democratic legislators in Sacramento to respond to rising gas prices with a new tax on fuel suppliers was a shock to many.

“Let’s be clear on what’s happening right now,” Assemblyman Vincent Fong (R) said at the March 28 hearing on Kiley’s proposal. “A bill to temporarily suspend state gas tax for six months to provide immediate relief to Californians is being hijacked…everyone watching should be ashamed of this process.”

“Only Assembly Democrats would think you can bring down gas prices by increasing the gas tax,” said GOP Assembly Leader James Gallagher. “Today’s stunt in the Transportation Committee shows just how far Democrats will go to delay and avoid giving Californians any relief from high gas prices.” Assemblyman Alex Lee (D), who led the effort to alter Kiley’s bill so that it resulted in a tax hike instead of a tax cut, stated that his proposal was motivated by what Lee referred to as “the greed of fossil fuel corporations.”

The average price of a gallon of regular gas in California hit $5.91 on March 30, which is nearly 40% above the national average. As California Assemblyman Fong and others have pointed out, taxes and regulations account for approximately 21% of the price of gas in California, leaving Golden State policymakers with the ability to apply downward pressure on prices at the pump should they wish to do so.

While the rebates proposed by Governor Newsom and the temporary gas tax cut proposed by state legislators would provide temporary relief, critics point out it could exacerbate inflation and that permanent relief would be more effective. “Additional one-time transfers put even more pressure on the system,” notes Jared Walczak, vice president of state projects at the Tax Foundation. “Even if taxpayers put only a fraction of the money toward additional consumption, the result is more demand-side pressures when there are already supply shortages…Permanent rate reductions or structural reforms create a higher return to labor and investment, and thus promote economic growth.”

If California lawmakers were interested in a longterm policy change that would permanently reduce gas prices, they could achieve that outcome by repealing the state’s cap & trade program, which effectively imposes a carbon tax that drives up the cost of gas and results in other forms of energy price inflation, such as increased utility bills.

“A recent LAO analysis calculated that gasoline producers are passing along that cost to consumers as part of California’s cap & trade program, which requires companies to buy permits and credits to account for their greenhouse gas emissions,” the Mercury News reported on March 9, noting that cap & trade adds an estimated 23 cents per gallon to the cost of gas. Other taxes and regulations that make gas cost so much more in California compared to other states include the low carbon fuel program, the underground storage fee, the state gas tax, along with state and local sales taxes.

Assemblyman Kiley pointed out that while he was willing to put his name on his bill, Democrats on the Transportation Committee refused to add their names as bill sponsors after they amended AB 1638 so as to turn it into a tax hike on fuel suppliers. “So here’s the difference — we have here two proposals. I’m willing to put my name on my proposal,” Kiley noted after Democrats amended his bill. “We are willing to own our proposal; you aren’t willing to even put your name on yours.”

“Do you ever wonder why more people are leaving our state today than ever,” Kiley asked Transportation Committee Democrats after they turned his proposed tax cut into a tax hike. “This used to be the state where anyone can get ahead. Now it’s the state people can’t wait to leave behind. The proceedings here today are a perfect example of that.”

Nearly A Dozen, Democratic-run, Blue States Recently Rejected Cap & Trade Due To Its Inflationary Effect On Gas Prices

While it highly unlikely that the lawmakers who control the California Legislature would have any interest in repealing their cap & trade program, if they somehow did so they wouldn’t be the first Democratic-run state legislature to reject such a carbon pricing scheme. A proposal for a new regional cap and trade program comprised of northeastern and mid-Atlantic states, dubbed the Transportation & Climate Initiative (TCI), was abandoned at the end of 2021 due to lack of support. Among the dozen, mostly Democratic-run states that were pitched on joining TCI, a years-long effort lead by the Georgetown Climate Center, Massachusetts was the only state that ever fully committed to the program and that was mostly due the fact that Massachusetts was the only state where is was determined that the governor could sign the state up for TCI without legislative approval.

The main objection that TCI backers could not surmount was the fact that the program would drive up gas prices and would do so by design, imposing a regressive tax hike that would disproportionately harm low- and middle-income households who can least afford the increased costs. Not only that, even TCI backers acknowledged that transportation emissions are projected to decline even if the cap & trade scheme were never implemented.

“The Baker-Polito Administration always maintained the Commonwealth would only move forward with TCI if multiple states committed, and, as that does not exist, the transportation climate initiative is no longer the best solution for the Commonwealth’s transportation and environmental needs,” Governor Charlie Baker’s press secretary said in a statement released on November 18, 2021, the day TCI officially died.

“TCI is a regressive gas tax scheme that would have hurt (the) middle class and the working poor the most,” Paul Craney, spokesperson for Massachusetts Fiscal Alliance, said of Governor Baker’s decision to cease the push for TCI. “It’s such wonderful news to see that Massachusetts families will not be forced to endure the economic hardship TCI would have imposed upon them.”

Governor Baker had the foresight to abandon a gas price-inflating program in the face of rising gas prices and the highest overall inflation in four decades. That the plug was pulled on TCI due to rising gas prices last November, three months before Russia invaded Ukraine, helps explain why so few are buying the White House’s assertion that Vladimir Putin is primarily responsible for high gas prices.

Permanent tax and regulatory relief, such as repeal of California’s cap & trade program, is the best way for state policy makers to provide long lasting price relief at the pump. Yet, no matter what state officials do to reduce the cost of gas, they will have to contend with a White House that is advancing contradictory policies.

President Joe Biden’s Fiscal Year 2023 budget proposal, as a recent example, includes $45 billion in tax hikes on the oil and gas industry. The Biden Administration admits this is designed to discourage investment in domestic production. The Biden Treasury Department issued a complementary budget document that defends these energy tax increases by asserting that more investment in U.S. oil and gas production is “detrimental to long-term energy security” of the nation. In light of this, along with the recent revelation that the Biden administration is going to delay drilling leases in the Gulf of Mexico for a third straight year, it appears that whatever state actions are taken to reduce fuel prices will continue to run into the headwinds of contradictory and more macro-economically consequential federal decisions.