California’s bill that sends refunds to taxpayers to deal with soaring gas prices may not solve the problem the government helped create. Instead, it could make the situation worse by pushing gasoline prices even higher.
It’s like throwing “fire on a gasoline fire”, according to Dan North, senior economist at Allianz Trade.
California is an unusual state in many ways. It taxes its residents heavily, which helps create budget surpluses for the government. And it has many regulations, which increase the cost of essential goods residents buy, such as gasoline, which is about 30% more expensive than the national average. This makes California one of the most expensive places to live in the country, a situation that has worsened with the recent resurgence of inflation.
But help is on the way. Last week, the California government passed a bill that will send out 17.5 million stimulus checks. In theory, this is a good policy. It will send some of the public funds back to the taxpayers it collected in the first place and help them pay skyrocketing household bills.
In practice, this policy may turn out to be the wrong approach because it fails to address one of the main drivers of California’s record gasoline prices. The numerous state regulations increase the cost of gasoline and push prices well above the national average. In addition, the stimulus checks help account for what economists call demand-pull inflation, one of the drivers of the resurgence of inflation at the federal level.
“Every policy, including this one, has both a cost and a benefit,” North told International Business Times. “There is no free lunch in the economy. Suppose all $17 billion was used to buy gasoline – that would be a 47% increase in the amount of money chasing the limited gasoline supply “It’s like throwing gasoline on fire gasoline. This plan could actually raise the price of gasoline. That’s the cost of this policy.”
What if Californians spent the rebate on things other than gas? North doesn’t think the cash will bring significant relief because it’s only 1% of California’s total annual personal consumption spending.
As for why gas prices are so high in the first place, North has a simple answer.
“California has more taxes, regulations, and less supply available,” he said. “The California state excise tax on gasoline is $0.511/gal, compared to a national average of approximately $0.29/gal. Regulatory fees include a cap and trade program, low-carbon fuel and underground storage fees California also requires a unique blend of gasoline, which only a limited number of refineries can produce, driving up costs The government is driving up costs, not so many businesses.
North thinks state reimbursements are much more for politicians than for Californians.
“A policy with little fiscal cost, the potential to raise gasoline prices and provide little overall economic relief,” he said. “However, it has the great advantage for politicians to give the impression that they are doing something.”
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