Hawai'i no longer has one of the highest gasoline taxes in the nation, but consumers may not see any of the savings.

Fuel taxes are dropping this month by about 9 cents per gallon as service stations switch to gasoline blended with ethanol. To encourage use of the alternative fuel, the state doesn't charge the usual 4 percent general excise tax.

Many service stations have switched to ethanol-blended gas ahead of an April 2 state deadline for selling the grain-based fuel. Once they switch, the stations can stop collecting and paying the general excise tax. However, there is no requirement that they pass the tax savings on to consumers.

Bob Swartz, who operates Chevron stations in Kalihi, Kane'ohe and Kailua, said he's no longer collecting the general excise tax, but he hasn't lowered prices. "We need to recover the costs," Swartz said.

He said an increase in the wholesale price of gasoline — up about 31 cents in the past month — coupled with expenses related to using ethanol, made it difficult for him to pass on the tax savings.

The added expenses include cleaning storage tanks and keeping them free of water. Unlike gasoline, ethanol can mix with water. If water collects in the storage tanks, a portion of that water could mix with the ethanol and end up in a consumer's car.

"I have to make sure that I don't have water in my tanks and I don't know what that costs yet," Swartz said, adding that he has installed water filters and is testing tanks daily for water.

Another reason prices remain high is that retailers may be waiting to see whether their competitors pass on the tax savings.

"It's like everything else —you wait to see what the competition does" before changing prices, said Bill Green, a former owner and now consultant to Kahala Shell.

The net result is that consumers may see little benefit from Hawai'i's retreat from its long-held position near the top of the list of states with high gasoline taxes.

In August, Hawai'i consumers paid 60.1 cents a gallon in taxes, the second highest in the nation behind New York. Remove the general excise tax, and Honolulu's tax on gasoline drops to 50.9 cents a gallon. On Maui, which has the state's highest taxes, the rate dips to 52.4 cents. Both figures include 18.4 cents a gallon in federal taxes.

The change means Hawai'i's gasoline taxes drop below the rates in California, Connecticut, Illinois, Michigan and Nevada, according to a report by the American Petroleum Institute.

While Hawai'i's taxes may no longer be the highest, the state can still lay claim to the highest gasoline prices in the nation. According to the AAA Daily Fuel Gauge Report yesterday, the statewide average for regular was $2.85 a gallon, or 34 cents higher than the national average of $2.51.

Meanwhile, Hawai'i's gasoline taxes at stations that have switched to the ethanol blend are now only 5 cents higher than the national average reported by the American Petroleum Institute.

The drop in taxes has been muted by the recent rise in the state's gasoline price cap.

The gas cap, which applies only to wholesale prices, has been rising since mid-February in reaction to rising Mainland prices. Since then the maximum wholesale price for regular gasoline on O'ahu has climbed about 31 cents a gallon to $2.10. That price excludes taxes and retail markup.

The sale of gasoline with 10 percent ethanol isn't mandated to occur until April 2. However, dealers have begun taking delivery of the new gasoline as the oil industry converts early.

Last weekend Kahala Shell took its third delivery of ethanol gasoline. The Kahala station no longer is charging customers the general excise tax, although prices have remained stable at $2.799 a gallon for regular.

The general excise tax exemption for ethanol-blended gasoline could cost the state an estimated $28 million between April and January 2007. The exemption, which was enacted in 1980, expires at the end of this year.

Several lawmakers are proposing that the tax exemption be extended for up to two more years.

Reach Sean Hao at shao@honoluluadvertiser.com.