What would a gas tax holiday mean for Minnesotans?

22 June 2022

With average Minnesota gas prices up over $4.70 per gallon and summer well underway, people are feeling pinched at the pump, where depending on the vehicle, it costs most drivers somewhere between $55 and $160 for a tank of regular gas.

As gas prices have risen in recent months, policymakers have floated — and in some states, implemented — something called a gas tax holiday, which provides temporary relief from taxes on gas.

So, when you’re paying $50 or more to fill up in Minnesota, how much of that is going toward gas taxes, and what happens with that money?

Where the money goes

Across the U.S., gas prices have risen precipitously in recent months. The reasons for the increase in prices are various: among them, the pandemic slowed demand for gas, reducing production. Then life largely returned to normal, which increased demand again. Earlier this year as gas prices were stabilizing, Russia — a major oil producer — invaded Ukraine, causing other countries to import less Russian oil, pushing prices of the global commodity higher.

At the average price of gas in Minnesota right now ($4.736 per gallon per AAA), a midsize SUV with a 14-gallon tank would cost $66.30 to fill — $26 more than it would have cost a year ago, when the average Minnesota gas price was $2.863 per gallon.

How much of that is gas tax?

Unlike the state’s regular sales tax, which is a fixed percent of the price of what you’re buying, state and federal gas taxes are the same per gallon regardless of what gas costs. It hasn’t gone up with the price of gas.

For every gallon of regular gas Minnesotans buy, we pay 47 cents in taxes — 28.6 cents to the state and 18.4 to the federal government. That’s 9.9 percent of the total cost of the average gallon of gas right now.

Of the 28.6 cent Minnesota gas tax, 28.5 cents of that tax goes toward roads and bridges in the state. 

Under the state’s Constitution, “Nothing can be done by the Legislature, (the Minnesota Department of Transportation) or whoever to move that money to any place except to highways,” said Adeel Lari, director of innovative financing for the State and Local Policy Program at the Humphrey School of Public Affairs, who previously worked at the Minnesota Department of Transportation.

The state’s gas tax collections averaged $910 million per year between 2016 and 2020, according to data compiled by Lari and colleagues.

The Legislature has a funding formula that determines where revenue from the gas tax goes, with the largest portion going to state highways, followed by counties and municipalities, Lari said. A smaller portion is re-distributed again. 

Minnesota’s gas tax also includes  a .1 cent per gallon inspection fee. Most of this fee helps pay for regulating gas sellers and monitoring gas supply, but a small percentage goes toward a program to help property owners increase energy efficiency, and another small part goes into the state’s general fund, according to the Department of Revenue.

The federal gas tax, first implemented in 1932, goes toward highways and mass transit. It has been 18.4 cents per gallon since 1993.

About average

Minnesota’s state gas excise tax has been the same since 2012, after a gradual increase from 20 cents per gallon starting in 2008.

Compared to other states, our 28.6 cent tax falls near the middle, according to data compiled by the Federation of Tax Administrators.

At the high end are states like Pennsylvania (57.6 cents per gallon) and California (56.6 cents). At the low end is Alaska (8.95 cents).

Minnesota’s gas tax is also slightly lower than most of its neighboring states, with the exception of North Dakota (23 cents). Wisconsin’s gas tax is 32.9 cents per gallon and South Dakota and Iowa’s are 30 cents.

While many states and the federal gas tax haven’t increased dramatically, even with inflation, some states tie their gas taxes to the Consumer Price Index, so they adjust to inflation.

Proposed gas tax holidays

While many drivers would no doubt welcome the relief, gas tax holidays aren’t popular with everyone: Critics say they don’t actually save consumers much money, that some of the benefits go to producers and they potentially shortchange the infrastructure projects that gas taxes fund. Furthermore, they argue the tax is a reasonable price to pay for use of transportation infrastructure.

Assuming a driver reaped the whole benefit of a gas tax suspension, a state gas tax holiday would save an SUV driver filling a 14-gallon tank about $4 on a $66 tank of gas at current prices in Minnesota. A federal gas tax holiday would save that driver roughly $2.60.

If that driver fills up once a week, the savings from state and federal gas tax holidays  would amount to $26 in a month, or about 9.8 percent of the roughly $264 that driver would spend on gas in a month at current prices.

Still, politicians on both sides of the aisle are supporting temporary relief from gas taxes now.

This week, President Joe Biden asked Congress to suspend the 18.4 cent per gallon federal gas tax until the end of September, using revenues from other sources to make up for losses to highway funds.

Some people are clamoring for reprieve from the state gas tax, too: On Tuesday, the editorial board at the Duluth News Tribune praised the Biden administration’s support for a gas tax holiday, and lamented low odds that Minnesota will follow suit. 

Despite support from some politicians on both sides of the aisle, it would take a special session to pass a gas tax holiday in Minnesota. Most people who watch the Legislature aren’t holding their breath.

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