Iran war spurs states to consider gas tax halt as fuel costs surge

The war in Iran is prompting states across the country to consider temporarily cutting fuel taxes, a relief measure that could cost them millions of dollars.

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As war in the Middle East pushes up energy prices, some government officials are advocating for gas tax holidays to try to help consumers struggling with average costs of $4 a gallon, up roughly 30% from a year ago. Even with the U.S. and Iran reaching a fragile ceasefire, drivers are likely to face elevated gas prices for the near future.   

Last week, Indiana announced a gas tax holiday, with Governor Mike Braun suspending the 7% tax on fuel for 30 days, costing $50 million a month. Both Georgia and Utah have already approved such holidays, while lawmakers in states including New York, Alabama and South Carolina have called for similar measures. 

The suspension of gas taxes in Georgia through mid-May is expected to cost just under $400 million, the state’s house speaker Jon Burns said in a statement. For Utah, which proposed the holiday amid affordability concerns even before the Iran war, its law discounting the gas tax from July 1 through the end of the year will cost the state about $12 million, according to the legislation.

This loss of state tax revenue comes at an inopportune time. The expiration of pandemic aid, slower revenue growth and a reduction in federal funding have all pressured state budgets in recent years, forcing many to find ways to lower spending. 

Plus, the impact of these measures may be limited, with some studies showing that part of the benefit is absorbed into the supply chain. For Georgia’s holiday, the bottom 60% of families will collect just 22% of the cuts, the Institute on Taxation and Economic Policy’s research director Carl Davis said in a report. 

Davis calls these measures “token relief,” in which state lawmakers feel pressured to take action to help consumers, even if it’s largely ineffective.

“It’s not like sales tax that you see on a receipt,” Davis said. “You’re counting on the savings getting passed from the wholesalers to the retailers to the customers.”

Motor fuel taxes are often a key source of funding for transportation infrastructure, and temporarily suspending them can lead to project delays or forced reallocations of funds, said Lucy Dadayan, a principal research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, in a recent report. 

Utah Representative Cal Roberts, who backed his state’s bill, said that he’s not concerned about draining state funds. 

While there is always a risk that retailers take some of the benefits, it’s still a way to help put more money back in Utah residents’ pockets, he said, adding that the state is putting together a deal with refineries to increase production by about 12% and reduce permitting to get more pipelines into the state.

“The answer on fuel price is always supply,” Roberts said in an interview. “We can’t control what happens on the macro international crude market, but we can control oil production and pipelines here.”

Looming decline

The volatility in oil markets could lead to longer-term challenges for state budgets, according to Dadayan’s report. Sharp increases in oil prices are often followed by declines, which can whipsaw state economies.

For instance, nine states including Alaska, North Dakota and Wyoming are particularly affected by changes in severance taxes, which are imposed on companies extracting nonrenewable natural resources within state borders, according to the report.

When oil prices spiked in 2022, severance taxes comprised roughly one-fifth of total state tax revenue across these states, compared to about 2% nationally, the report said. But when prices dropped, some experienced outright declines in total tax revenue.

While many states put safeguards like monetary stockpiles in place to help manage this, long-term fiscal sustainability is a concern, Dadayan said. 

Although President Donald Trump is pushing for more production, most oil companies are taking a wait-and-see-approach in response to the inflated oil prices from the war.

“Ultimately, the key variables are how long the war lasts, how high oil prices go, and how long they stay elevated,” Geoffrey Buswick from S&P Global Ratings said. “If prices reach certain thresholds, that could trigger new drilling — but we’re still waiting to see those decisions play out.”

Even states less dependent on oil are likely to be affected by an expected spike in inflation from the energy price increases, which could push up construction and infrastructure costs, according to Dadayan. Meanwhile, residents could pull back on spending, reducing sales tax revenue at a time when growth in this area is already soft, she said.

“At the end of the day, cost goes up and states need to have a balanced budget,” Dadayan said in an interview. “There is no clear winning in this environment.”