Policy Brief May 19, 2008
Contact:
John Tillman
312-346-5700 x 203
jtillman@illinoispolicyinstitute.org
A Stimulating Idea:
The Case For An Illinois Gas Tax Suspension
(Chicago, IL) Critics say that the effect of suspending the Illinois Gas Tax will be minimal and
would deprive state government of needed taxes to build highways and roads.
They are wrong on both counts.
Lowering the gas sales tax from 6.25% to 1.25% (HB6318) will make a material difference in the
lives of Illinois residents in a number of ways, including pumping a minimum of $220 million into
the economy over 4.5 months.
The current Illinois tax burden is the fourth highest in the country on gasoline and diesel fuel at
$0.395 per gallon and $0.413 per gallon, respectively.i The taxes collected from sales taxes on fuel
go into the state’s general fund and will not affect taxes collected and specifically allocated to roads
and transportation.
The purpose of this paper is to examine the economic impact of a 4.5 month moratorium in
collecting the state’s sales tax on the purchase of motor fuels.
The gas sales tax moratorium will make a real difference for consumers, particularly the poor and
working class, and it will also positively impact the trucking industry. On this basis alone, this is
good public policy and an excellent first step in improving Illinois’ economic outlook. As to
transforming Illinois from a slow-growth state that continues to fall behind its neighbors and the
rest of the nation, the policy changes required will be covered in our forthcoming brief, Illinois: A
Liberty Agenda for Growth and Prosperity.
The Numbers
Table 1 (see page 3) illustrates the impact of the gas tax on two segments of the driving public, the
trucking industry and average consumer households.
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For truckers, it shows that the average driver will save nearly $1000 during the 4.5 months of the
proposed moratorium. Whether that money goes into an independent trucker’s pocket or whether it
improves the cash flow of trucking companies, this money, multiplied by the many thousands of
trucks operating in Illinois, will have a substantial positive effect on Illinois truck drivers, trucking
company owners and the many businesses that receive goods from the trucking industry.
In fact, one hidden benefit of the proposed gas tax moratorium is the mitigating effect it will have
on inflationary price pressure as a result of rising shipping costs. The trucking industry is a high-
intensity user, which, in turn, impacts prices in communities across the state. According to the
American Trucking Association, “…trucks haul 70% of all freight tonnage, and 80% of
communities receive their goods exclusively by trucks.”
Meanwhile, Table 1 also illustrates that for the average Illinois household, savings will total just over
$47 during the moratorium. While this may not seem like a large sum, it represents a material sum
to those most hurt by rising gasoline and food prices: the working class and poor. High fuel costs
are regressive in nature, having a disproportionate effect on household income, particularly in the
lower brackets. For the high-earning and affluent, $47 may be inconsequential; for those struggling
to make ends meet, it makes a real difference.
Further, this reflects the average Illinois household. For those high mileage drivers who have long
commutes to and from work, or for those who drive many miles as a part of their employment, the
savings will be much larger.
Critics state that the savings resulting from the gas tax reduction of 5% will not be passed on to
consumers. When referring to Illinois’ 2001 gas tax moratorium, one report states that “…for every
4 cents per gallon the Illinois government gave back to consumers, it gave 3.5 cents per gallon to oil
companies, gasoline stations and other suppliers of gasoline.” ii
In essence, the report’s author, Dr. Michael F. Martin, is complaining that the moratorium took 7.5
cents per gallon out of the government’s hands and put it into real people’s hands—drivers (53% of
the savings) and businesses (47%). We view drivers and businesses—i.e. “oil companies, gasoline
stations and other suppliers of gasoline”—as both being worthy recipients of their own money.
Even the study cited above, critical of the moratorium, acknowledges that 53% of the tax went to
consumers. Another study in 2005 demonstrated that 3% of the 5% reduction from the 2001
moratorium went directly to consumers (60%). We have two studies, one critical of the
moratoriums and one that appears to be neutral in terms of the policy, largely in agreement that
somewhere between 53% to 60% of the gas tax savings passes through to consumers.iii
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Table 1
Trucking Consumer
Impact Impact
Current Sales Tax 6.25% 6.25%
Proposed Sales Tax 1.25% 1.25%
Reduction 5.00% 5.00%
Duration in months 4.5 4.5
Annual Miles Driven 125,000 27,762
MPG 5 20
Gallons Consumed 25,000 1,388
Cost Per Gallon $4.25 $4.05
Total Fuel Cost $106,360.00 $ 5,621.81
Savings Per Gallon Est. $0.18 $0.15
Annual Savings $4,431.93 $208.36
Savings for 4.5 months $1,661.97 $78.13
Pass Through Saving @
60% $997.18 $46.88
# of Illinois Households 4,690,000
Total Household Savings $219,868,288
Sources for table: http://www.eia.doe.gov/emeu/rtecs/chapter3.html,
http://www.apta.com/research/stats/fares/drivcost.cfm,
http://www.bts.gov/publications/national_transportation_statistics/html/table_04_23.html, Weekly
Petroleum Status Report/Energy Information Administration
Who Benefits
Opponents of this policy state that it won’t do any good because gas prices traditionally spike in the
summer as demand goes up. True, and suspending the gas tax would help to offset that inevitable
spike.
According to the IRS, the average Illinois household can expect a federal stimulus check of $1200
(based upon the Census Bureau’s estimated household income of $45,787 and adjusted gross
income of $40,000). Every truck driver in Illinois can receive a similar stimulating effect of nearly
$1000 as Table 1 illustrates. (A request to the Secretary of State’s office on the number of truck
drivers in Illinois has gone unanswered.)
The Various Taxes on Gasoline
Illinois’s current Motor Fuel Gas Tax is $0.19 cents per gallon. Gasoline purchased at the pump is
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also subject to a 6.25% sales tax rate, plus an additional $0.003 per gallon gas storage tax.iv These
costs make the Illinois gas tax burden the fourth highest state surcharge on fuel in the country:
$0.395 per gallon.v Coupled with the federal gasoline tax rate of 18.4 percent, middle-class Illinoisans
are hit hard, paying an average $4.00 per gallon of gasoline.vi
When the tax was introduced in August of 1989, it was $0.13 per gallon.vii Since then, however, the
tax has risen threefold to $0.395, which is well above the rate of inflation from the period 1989-
2007.viii
Gas taxes have become a favorite of politicians, especially taxes levied as a percentage of the retail
price. As prices rise, so do the taxes, which has the net effect of a tax increase without legislators
having to pay any political price. In Illinois, where these revenues go into the general fund and are
not allocated specifically to roads and highways, this is just another means to increase revenues in a
politically painless way. It is only when gas prices spike substantially that citizens begin to focus on
the tax itself.
Conclusion
A moratorium on the state’s sales tax on gasoline and diesel fuel will not alter Illinois’ larger
economic challenges, but it is an important first step. It will make a material difference in the lives of
individual citizens, truckers, trucking companies and other businesses. Up to 60% of the savings
will accrue to people and businesses. For consumer households alone, it will pump $220 million
into their wallets rather than into government coffers. For those in the trucking industry, the
benefits will be on par with what the bipartisan federal economic stimulus package is currently
delivering into people’s mailboxes in the form of a stimulus check. Those checks have been widely
acclaimed by members of both parties as making a difference to the recipients.
If Illinois implements the proposed gas tax moratorium, this, too, is sound public policy that should
be applauded as a good first step on the way to making Illinois a better place for families, taxpayers,
and businesses.
ihttp://www.api.org/policy/tax/stateexcise/upload/December_2007_notes.pdf
“Who Benefits From Gas Tax Cuts?,” Michael F. Martin, PhD, Senior Economist for the American Road &
ii
Transportation Builders Association.
“$2.00 Gas! Studying the Effects of Gas Tax Moratorium,” Joseph J. Doyle, Jr. and Krislert Samphantharak, Center
iii
for Energy and Environment Policy Research
iv http://www.api.org/policy/tax/stateexcise/upload/December_2007_notes.pdf
v Ibid.
vi
www.gasbuddy.com survey of Chicago as of 5/14/08.
vii
35 ILCS 505/2 from Ch. 120, par. 418
viii http://data.bls.gov/cgi-bin/cpicalc.pl