Gavin Newsom’s Gas-Prices Plan Could Do More Harm Than Good

This week, California Governor Gavin Newsom proposed a kind of universal basic income for cars. This is, put short, a bad idea.

The proposal was part of a package of policies designed to shield families in the state from the wallet-squeezing, impoverishing effects of inflation in general, and spiraling gas prices in particular. He’s asking the state legislature for $500 million for walking and biking projects, three months of free public transit for everyone, $1 billion in tax adjustments for diesel fuel, and $9 billion to distribute $400 per car to people who own or lease vehicles, with a two-car max.

Newsom’s plan sounds reasonable, given that gas costs $5 a gallon or more in much of the state. It is not. The governor’s scheme, like many others put forward across the country in recent weeks, would fail to protect the most vulnerable families from increasing costs. It would waste the money of California taxpayers and damage the environment. And it might even make the nationwide inflation crisis worse.

Newsom and his advisers had few good options. Inflation is squeezing the budgets of millions of American families, but it is not something that government executives have a lot of power to fix, at least not without damaging the economy in other ways.

If Newsom gets his way, the very richest Californians would get the same $400-per-car payment that the very poorest Californians would get, though inflation is far less damaging for rich families than for poor families. Plus, people who own cars tend to be wealthier than people who do not, and Newsom is proposing giving debit cards to people who drive rather than people who take public transit, bike, or walk.

His approach runs contrary to the state’s climate goals, too. The governor has spent billions trying to forge an “oil-free future” for California, which is afflicted by year-round fires, severe droughts, rising oceans, pests and blights, mudslides, heat waves, and species loss. He is now proposing that the state spend billions to subsidize vehicle owners and encourage Californians to buy more gas—a policy that will also redound to the benefit of the ExxonMobils and Chevrons of the world.

Another problem: The changes might increase prices. Sending millions of Californians billions of dollars will stoke demand and support spending. Combine that with supply constraints and you have a recipe for higher prices on gas, apples, diapers, homes—everything. More inflation might not be such a problem if the state were focusing on providing cash to the lowest-income families facing the highest cost burdens. But getting cash to poor people is not what Newsom is proposing.

Republicans in California and politicians around the country are pushing for or have already slashed taxes on gas and other goods, citing the same concerns as Newsom. But oil suppliers, which are generally the ones who pay gas taxes, might pocket much or all of the savings, rather than passing them on to consumers. And, again, big tax cuts or rebates would likely increase inflationary pressures. “To the degree some of these tax cuts end up in the hands of oil companies, rather than consumers, the short-term effects on demand could be more modest,” notes Howard Gleckman of the Tax Policy Center. “But that probably is not what [politicians] have in mind. They are looking to hand out cash to voters just months before the coming elections. That ‘I feel your pain’ moment may win some votes. But it won’t enhance the well-being of their constituents.”

What are politicians supposed to do? The unfortunate answer is that there is not much they can do to fix the fundamental problem of too many dollars bidding for too few goods, at least not in the near term. Governors can’t increase the production of the many, many household items facing supply constraints. The White House does not have a magic wand it can use to smooth out kinks in the supply chain and reopen ports and factories around the world, closed because of waves of COVID-19 infection. State legislators have no leverage to stop Russia’s incursion into Ukraine and settle global commodity markets.

Democrats are looking at taxing oil companies’ profits, to redistribute the money to consumers, though such a move might discourage those companies from investing in boosting supply. The Federal Reserve does have the power to fight inflation by hiking interest rates, as it is already doing. But that risks slowing the economy down too much, too soon, and increasing the unemployment rate. And most people, including most Californians, would rather pay more for a tank of gas than lose their job. If California lawmakers want to take action against inflation, they could issue targeted payments and work to get the state off fossil fuels. They could also do nothing, which might produce better results than Newsom’s plan.

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