Recently, California has experienced an increasing trend of higher prices for gas and oil as compared to other states like Florida and Nevada in the US (Richards). The prices are not only high but also variable. Higher taxes imposed on oil and gas by the government of California mainly cause the rise in prices of these products. California has the highest gasoline taxes on local, state, and federal levels, 28% higher than other states have (California Alliance for Responsible Oil Policies). The state pays both the sales and exercise tax on fuel. The high prices impact the consumer in a negative manner. The transport system, especially commuters who have to use the fuel every day, is directly affected. The high taxes also affect oil producers because of the high cost of manufacturing. On the other hand, the government benefits from revenues generated from gasoline taxes. Regarding this subject, this paper aims at discussing the impact of reducing the tax rates imposed on gas and oil on producers, consumers, and the government in California. Furthermore, the paper discusses how the reduction of taxes will change the current state of affairs in California. It is advisable for the government of California to reduce the high taxes imposed on gas and oil to reduce the adverse effects of the high prices.
California ranks among the most highly taxed states in the United States (Moore, Laffer, and Griffith). In 2015, the tax rate of gasoline was at 59.32 cpg while other states levied a lower tax rate, like Arizona with 37.40 cpg (American Petroleum Institute). The high tax rate imposed on fuel in California causes the prices of fuel to be greater than in other states. Due to the constantly increasing prices of oil and gas in California, the cost of living is increasing day by day.
Effects on Producers
Reduction of tax rates levied on gas and oil will lead to a decrease in prices of these two products in California. The decline in oil and gas prices in the state will in turn affect the industrial sector both positively and negatively. The effects will be reflected in the production cost of the firms, the investment made by the companies, and the inter-industry trade. The impact of the oil and gas prices fall will mostly affect oil and gas-intensive sectors.
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Production Cost. As the price of oil and gas falls, companies will reorganize their production process to maximize the cheaper inputs that will enable them to increase their output. Oil intensive sectors in California such as agriculture, utilities, manufacturing, and transportation will benefit most from reduced prices. Reduced prices for oil and gas will lead to a decrease in the production cost in the industrial sector. Reduced production cost will enable the producers to lower the prices of their commodities that will in turn result in the increased demand for the outputs (Husain et al. 30).
However, a reduction in the prices of oil and gas will have adverse effects on firms that are not oil and gas intensive. Reduced prices for oil and gas will see them facing stiff competition from oil and gas-intensive companies that are producing commodities at a lower price. As a result, it will influence their pricing policies, as they will attempt to ensure that they remain in the market, which will have a negative implication on their profits.
Investment. Due to the increase in demand because of a reduction in the price of the commodities, the manufacturers will have to raise their supply to meet the rising demand. To increase the supply of products demanded, it will be necessary for companies to increase the level of investment in the production process. Decrease in prices of commodities produced in the industrial sector of California will lead to a rise in the demand for exports (Hsu). The industrial sector will also invest in the labor force to meet the increasing demand for the outputs, hence creating employment.
In the oil and gas sector, investment will increase owing to reduced gas and oil price due to increased demand for the oil and gas by the oil and gas-intensive industries. For firms that are not oil and gas-intensive, the investment will reduce significantly due to reduced demand for their products as the oil and gas-intensive firms will reduce their prices. However, the overall impact will be positive since most sectors in California’s economy are oil and gas-intensive.
Inter-industry Trade. Increased production in various companies within an industry will lead to a greater demand for the supplier inputs. Increased demand for the vendor inputs will positively affect the supply chain as one goes down through the multiplier effect. Therefore, the companies will spend more money on the California’s economy that will lead to increased growth of the industrial sector in the state. The more the industry sector grows, the more government revenue it generates, which contributes to increased employment level (Husain et al. 29).
However, the reduction in oil and gas prices will not be uniform in all sectors as there will be some adverse effects on the manufacturers. Companies that operate in the export market will experience an increase in competition from local businesses because of lower production and transportation cost, hence competing on prices. Competition in prices will push these organizations to lower their product prices, leading to a reduction in profits (Husain et al. 29).
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Effects on Consumers
As a consequence of the government of California reducing the tax rates imposed on oil and gas, consumers will directly experience the effects of the fall in prices of commodities as discussed earlier. The decreased prices of products will influence the household’s spending, inflation, and standards of living.
Households Spending. The consumers will be the primary benefactors of a drop in oil and gas prices owing to a fall in the tax rate imposed on these products. The businesses will pass on the cost saved to the consumers in the form of cheap goods and services. As the sectors expand, labor demand will increase, leading to a rise in the level of wages. Therefore, consumers will enjoy an increase in their spending power. The overall net impact of the reduction in oil and gas prices in California will be an increase in the real household spending, as consumers will buy more goods due to lower prices associated with a decline in the price of fuel (Husain et al. 22).
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Inflation. Due to the reduced cost of production because of the fall in the prices of oil and gas, oil and gas-intensive goods will become cheaper. The cost saved by the producers will offset the current high price of commodities in California, thus reducing inflation. A reduction in the rate of inflation will increase consumer’s value for money, and one will spend less money on more goods in the market. Therefore, reducing the prices of oil and gas will have a positive effect on the rate of inflation (Horn)
Living Standards. Owing to the increased demand for labor in the industrial sector when the prices of oil and gas decline, the wage rate will rise. Improved wages and expansion of the industrial sector will lead to an increase in the level of employment hence economic growth. Economic growth will lead to increased consumption level, reduced unemployment and poverty, and improved public service. Thus, reduction in the price level of oil and gas will result in improved standards of living among the citizens of California (Husain et al. 22).
Effects on the Government
Reducing tax rates levied on oil and gas in California will affect the revenue collected by the government of the state through various ways. Firstly, low oil and gas prices will affect the economic growth through tax gained and tax lost. Secondly, the price fall will be felt in the creation of employment that has a direct relation to the growth of the economy. Lastly, the effect of a drop in oil prices will influence the government of California through its impact on the trade deficit.
Tax Gain and Tax Loss. By implementing a tax reduction policy, the government of California will experience a decline in tax revenue due to a decrease in taxes collected from the oil and gas sector. However, as a result of increased production in the industrial sector, the government will reap even more revenue through tax caused by the expansion of this industry. Increased demand for the cheap commodities because of lower production cost will increase the output supplied by the producers, which translates into more revenue for the government in the form of taxes. Therefore, a decrease in the tax rate imposed on oil and gas will have an overall positive effect on the revenue generated by the California government in the economy (Husain et al. 29).
Employment. The industrial sector will expand due to increased commodity demand after a decrease in the prices of oil and gas. As a result, the employment level will go up. As manufacturers experience increased demand, they tend to invest more in the production process, including the workforce. As the demand for labor increases, both wage rates and employment level will rise, hence propelling economic growth. Due to the economic growth, government revenue collected from personal income taxes will increase in California. For instance, according to a study by Moore, Laffer, and Griffith, states with zero-income tax rate had more than double job growth rate.
Trade Deficit. If the government of California reduces the tax rate imposed oil and gas, the trade deficit will improve although by a small margin. Expansion of the industrial sector as a result of increased demand for commodities produced will lead to an increase in export in the long-run. In the short-run, as commodity prices fall, more goods will be consumed domestically in California, thus reducing the export level. However, in the end, firms in the state will experience international competitiveness and their level of exports will rise significantly. The overall impact will be a small reduction in the trade deficit (Monetary Policy Report February 2015 46).
A decrease in the tax rate levied on oil and gas in California should be implemented to lower the prices of these commodities. The overall impact of lower oil and gas price as discussed in this paper will be positive for the producers, consumers, and the government of California. Producers will benefit from manufacturing commodities at a low cost, thus increasing production volumes and creating employment opportunities. As a result, the government will be able to solve the problem of unemployment in the state. On the other hand, the government will lose in revenues generated from gasoline taxes. Consumers will benefit from buying commodities at a lower price than in the current situation. Their standards of living will also improve due to the increase in employment opportunities.