I thought the problem was shortages not cost. Won't eliminating the state taxes increase demand, thereby exacerbating the supply problem?
Yep, and they've 'just' discovered a huge oil spill from a leak out in the Gulf.
Yes. Lowering prices increases aggregate demand. Increasing demand in the face of limited supply is going to cause the prices to rise until they reach equilibrium. Prices will go right back to where they are now, the money will just be in someone else's pocket.