Tax Analysts Blog

Virginia Gas Tax Cut: Drivers Short-Changed at the Pump?

Posted on Jul 15, 2013

On July 1, Virginia's 17.5 cent per gallon gas tax was repealed. It was replaced with a 3.5 percent sales tax on the wholesale price of gasoline. The new sales tax on gas works out to be a levy of 11.1 cents per gallon. The net effect is a 6.4 cent tax cut. Unluckily for politicians in Virginia there has been massive unrest in Egypt that increased crude oil prices. So whatever benefit the tax cut might bestow on consumers is lost to drivers who have only experienced rising prices since the change. The chart below shows what drivers were seeing while filling their tanks.

Would Virginia gas prices have risen even more--6.4 cents more--if there had not been the tax change? To answer this question we can look at gas price rises in neighboring states and see if their price increases have been sharper. Unfortunately, neighboring Maryland and Kentucky had significant gas tax hikes so comparisons with those states are not useful. That leaves North Carolina--roughly similar in size, geography, and population--as a good candidate for comparing price changes. (North Carolina did have a small increase of 0.1 cents per gallon).

If the gas tax cut was working for the benefit of drivers, we would expect the differential between North Carolina and Virginia gas prices to increase by about six and a half cents. The chart below compares the average differential for the last five days before the tax change (June 26-30) to the most recent five days (July 9-13). It shows the differential increased by only 1.8 cents.

A partial explanation for this shortfall is that not all of Virginia got a tax cut. The extreme southeast corner of Virginia around Virginia Beach and Norfolk actually got a small net tax increase (2.1 percent of the wholesale price of gasoline) to pay for transportation projects in the area. But this area accounts for only about 18 percent of Virginia's gas consumption. Assuming this percentage might increase to, say, 25 percent because of extra summer beach traffic, the expected average price decline across Virginia would be three-quarters of 6.4 cents, that is, 4.8 cents.

This analysis is not the final word on the incidence of the gas tax cut in Virginia. With gas prices jumping around for a dozen different reasons, it is hard to isolate the exact effects of the tax change. But the small 1.8 cent per gallon increase in the differential between North Carolina and Virginia after the tax change gives Virginia drivers good reason to question whether gas tax cuts are primarily for their benefit.

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