The Hawai'i Legislature took an important step in the direction of tax relief this year when it voted to restore a tax exemption for ethanol-blended gasoline. That legislation was signed into law by Gov. Linda Lingle on Tuesday and takes effect Sunday.

Hawai'i's gasoline taxes are frequently near the highest in the nation and are often cited as one of the reasons gas historically costs more in Hawai'i than in other states. Overall, state taxes on gasoline currently total about 60 cents per gallon — the second-highest in the nation and 14 cents per gallon above the national average.

The new law that restores the exemption will result in lower gasoline taxes at the pump. However, that same legislation will also increase another state tax levied on each gallon of gas by one cent.

The role that state taxes play in retail gasoline prices in Hawai'i was clearly evident on Jan. 1, 2007, when the general excise tax exemption expired and consumers saw about an 11-cent increase in gas prices at the pump.

Having taken the step of legislating tax relief from the GET, Hawai'i's legislators can further help consumers by addressing other commonly cited reasons why gasoline prices in Hawai'i are higher.

The Federal Trade Commission and other analysts have observed that Hawai'i's gas marketplace suffers from a heavy burden of state regulations. According to the FTC, "several features of Hawai'i's market tend to reduce retail supply and increase retail prices."

Included in the list are rent controls for stations operated by lessee-dealers and restrictions on the ability of gasoline marketers to open new company-operated stations. Consumers almost always benefit from efficiency and competition — neither of which is supported by those two regulations.

Hawai'i's previous attempt to regulate gasoline prices — the so-called gas cap law — was another example of what can happen when government regulations get in the way of market mechanisms. According to the Department of Business, Economic Development & Tourism, that failed experiment cost Hawai'i consumers as much as $55 million in just five months.

"The costs to locally regulate the price of a globally traded commodity, like gasoline or any petroleum product, far outweigh any potential benefits," DBEDT concluded.

After suspending the gas cap law, legislators this year enacted a transparency law currently being implemented by the Hawai'i Public Utilities Commission. This new law created the Petroleum Industry Monitoring, Analysis and Reporting program, requiring oil companies to provide the state with additional information about their operations on top of the large amounts of information they already regularly supply to state and federal agencies.

While the new reporting requirements will impose additional burdens and costs on businesses, they are intended to help lawmakers, regulators and consumers better understand the complex nature of the transportation fuel market, both globally and locally.

Supply and demand and other economic factors, combined with high taxes and overregulation, are the key elements that determine Hawai'i's gasoline prices.

Understanding the impact taxes and regulations have on the very complex business of manufacturing and supplying transportation fuel across an isolated chain of islands may well be a necessary first step toward understanding gas prices in Hawai'i.

Joe Sparano is president of Western States Petroleum Association, a nonprofit trade association that represents approximately 30 companies that account for the bulk of petroleum exploration, production, refining, transportation and marketing in Arizona, California, Hawai'i, Nevada, Oregon and Washington. He wrote this commentary for The Advertiser.