Where Your Gas Dollar Goes

A cost breakdown show that tax tinkering may not help much

August 10, 2008|By Paul Adams | Paul Adams,Sun reporter

Wondering how all that extra money you're spending on gasoline is split up among government taxes, refinery production and corporate marketing, among other things?

It's not going to refiners, who have seen their margins drop as they scramble to turn more oil into gas. It's not going to corner gas stations, many of whom say they are being forced out of business by falling profits. And it's not going to the federal government, which is seeing its gas tax revenue slide as people drive less to save money.

"It's the guys who own the oil being pumped out of the ground, and overwhelmingly, it's people in the Middle East," said Lester Lave, an energy expert and economist at Carnegie Mellon University.

Based on June figures, crude oil accounted for 74 percent of the price of a gallon of gas, which at that time averaged $4.05 nationwide, the Energy Information Administration reports. (The agency's June figures are the most recent available.) At that price, gas would still cost $3.03 per gallon if you eliminated all costs for taxes (39.9 cents), distribution and marketing (27.7 cents), and refining (34.6 cents).

The price of oil has since come down a bit, falling to about $120 per barrel last week after hitting an all-time high of $147.27 in July. But it remains high by historical standards, while taxes, refining and distribution costs have remained comparatively flat. And analysts say it could easily rise again if the Gulf Coast is hit by a hurricane, or other factors combine to renew anxieties about supply.

That's why economists say they are skeptical when they hear politicians talk about cutting gas taxes or opening the nation's strategic oil reserve in hopes of lowering prices. Both would have short-term benefits for consumers, experts say. But neither would do much to solve the underlying problem, which is that demand for oil is growing faster than supply.

"There's nothing we can really do to put down the price of oil that's going to be meaningful," Lave said.

Thomas A. Firey, a senior fellow at the Maryland Public Policy Institute, said suspending the 18.4-cent federal gas tax - as presidential contender John McCain has proposed - would do some good. But he said only about half of the benefits would go to consumers.

The other half would assist oil and gas producers, he said, because the tax cut would encourage motorists to buy more gas. That would lead to higher prices, erasing some of the benefits of lower taxes.

Tinkering with fuel taxes might have had more impact in December 2001, when oil was cheaper and taxes accounted for nearly 39 percent of the price of a gallon of gas. But it makes less sense today, when oil is so expensive that taxes account for just 10 percent of the total price of gas on average.

And most experts agree that suspending state or federal gas taxes would create as many problems as it fixes.

The 18.4 cents per gallon collected by the federal government is used for highways, bridges and other projects to shore up the nation's aging transportation infrastructure. The rate hasn't changed since 1997, when it was increased from 18.3 cents. The nation's roads and bridges are in rough shape, as was evidenced by the Interstate 35-W bridge collapse in Minnesota that killed 13 people in August a year ago.

Maryland collects an additional 23.5 cents per gallon, which is slightly higher than the national average of 21.44 cents. The tax has remained at that level since 1992. The proceeds provide the backbone of the state's transportation trust fund. Most of the $755.7 million distributed from the fund in 2007 went to the state Transportation Department and local governments. Smaller slices went to Chesapeake Bay programs, the Waterways Improvement Fund and the Fisheries Research and Development Fund.Lave, the Carnegie Mellon economist, said it's ultimately cheaper to spend money to maintain roads than it is to cut taxes for short-term gain.

"When you're in a city that has potholes, you lose tires, you mess up your suspension system - it's very costly," he said. "If you want to drive your car around, the best thing for you is not to get the price of gas down, but to keep the infrastructure up."

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