States share blame for higher gas prices

Higher gasoline prices at a Sunoco station in South Philadelphia include state taxes that have doubled since last year.Chris Gardner / AP

With gasoline prices again hitting new highs, motorists trying to figure out who’s to blame have lots of choices — from OPEC to the weather. But in many cases, you can add one more name to the list: Your state government.

Gasoline prices this week zoomed past the previous record hit last summer, according to the latest survey from the American Automobile Association. The average price of a gallon of regular hit $1.74, as stockpiles remained at their lowest levels since the 1970s. Part of the reason is that an unusually cold winter kept refiners pumping out more heating oil than normal. And much of the blame can be traced to surging crude oil prices, now hovering near 14-year highs.

But part of the higher cost at the pump has nothing to do with the price of petroleum. Despite a national economic recovery, state budgets are still reeling from the impact of the latest recession. And gasoline taxes have provided a ready source of cash, according to Steve Slivinski, a senior economist at the Tax Foundation.

“The general consensus, at least among those that are making tax policy, is that sales and income taxes are harder to get political support to raise than are specific excise taxes like fuel or cigarette taxes,” he said. 

Unlike Uncle Sam, most states are barred by law from running long-term budget deficits. Hemmed in by budget shortfalls, nearly half of the states raised state gasoline taxes last year — from as little as 1 percent (Iowa) to triple digit increases in New York (183 percent), Pennsylvania (116 percent), and Florida (253 percent).  The average state tax rose to 20.8 cents a gallon in 2003, up 7 percent from 2002, according to the Tax Policy Center. (Federal excise taxes cost you another 18.4 cents a gallon.)

Other states are likely to follow. Nebraska, Virginia, California and Oklahoma are currently considering higher gasoline taxes, according to Slivinski.

To be sure, most of the blame for higher gasoline prices rests with the jump in the cost of crude oil, which accounts for about half of the cost of a gallon of gasoline, according to the U.S. Dept. of Energy. Oil prices have surged to nearly $40 a barrel, as a growing world economy — and China’s industrial boom — have stoked demand. Meanwhile, the Organization of Petroleum Exporting Countries has set production cuts for April 1, though it’s not clear how closely oil producers will stick to those quotas.

As a result, the Energy Dept. predicts that gasoline prices will peak at $1.83 a gallon in late spring. If inventories build back to normal levels, prices are expected to hold steady or begin falling over the summer — as they did last year.

State governments have played another important role in the recent price spike at the pump. To meet air quality standards under the federal Clean Air Act, some states require reformulated gasoline — special blends that make gasoline burn cleaner and reduce pollutants during the summer months. But with some 15 different blends called for by state regulators, gasoline refined for one market can’t be sold in another area where a different blend is required.

Spot shortages of these special blends have already driven prices well above $2 a gallon in some parts of the country.

“This very complicated set of clean fuel regulations is actually causing a lot of the price instability,” said Geoff Sundstrom, a AAA spokesman.

This year, refiners are also coping with the phase-out of a popular summer additive, MTBE, which has been found in ground water and linked to cancer. Several states now ban MTBE in favor of ethanol. Local shortages of additives can also bring price spikes even when raw gasoline is plentiful.

One solution would be a national standard for cleaner burning fuel. But the comprehensive energy bill that has passed the House has no provisions for such a standard. In fact, one of the major sticking points holding up passage of the bill is a measure that would block lawsuits against MTBE manufacturers. The House version strongly favors limiting liability of MTBE makers, while the measure is opposed in the Senate.

Surging gasoline prices have also brought calls from Congress to look into whether gasoline refiners and retailers are unfairly raising prices. Sen. Ron Wyden (D-Ore.) on Monday reintroduced a bill calling on the Federal Trade Commission to act on what he called anti-competitive industry pricing policies. Earlier this month, the FTC month opened an informal probe into California's retail gasoline prices — the highest in the nation — at the urging of Sen. Barbara Boxer (D-Calif.)