Biden Gas Tax Holiday Could Worsen Price Surge

As gas prices soar to $5 per gallon, policymakers in the Biden administration and Congress are looking for ways to save Americans money at the pump. On Wednesday, President Biden announced that he is asking Congress to suspend federal gasoline and diesel taxes for three months, from July 2022 through September 2022. Unfortunately, a gas tax holiday is an ineffective proposal to address the current price surge, could exacerbate demand, and will rob the Highway Trust Fund of revenues to repair and maintain roads.

A federal gas tax holiday would temporarily suspend the 18.4-cent federal tax charged for each gallon of gas purchased. While it may appear that suspending the gas tax would save consumers money by lowering gas prices at the pump, consumers will only save a marginal amount of money according to a study conducted by the University of Pennsylvania Wharton Budget Model earlier this year. Assuming that 80 percent of the tax decrease from the tax holiday directly leads to lower prices, the Penn Wharton study estimates that consumers would save a total average of $16 to $47 over nine months (March 2022 through December 2022). Consumers would likely save even less on average with a gas tax holiday starting in July instead, and only lasting three months, as Biden has proposed. Penn Wharton argued that the tax holiday will lead to an increase in consumer demand for gas – and an increase in gas prices by consequence, which would partially offset the reduction in prices caused by the tax holiday.

Furthermore, a gas tax holiday may inflate gas prices once the tax holiday ends. This was the case in Maryland, according to another study conducted by the University of Pennsylvania Wharton Budget Model last week. Maryland enacted a state gas tax holiday between March 18 and April 16, waiving their state tax of 36.1 cents per gallon on gasoline and 36.85 cents per gallon of diesel. The Penn Wharton study shows the state gas tax holiday significantly decreased gasoline prices in the state of Maryland during the gas tax holiday period. However, once the holiday expired, gas prices in Maryland became higher than what they would have been without the tax holiday. So while a federal gas tax holiday may temporarily reduce gas prices, those prices will likely bounce right back after the holiday expires (assuming the level of energy production does not fluctuate heavily).

A federal gas tax holiday could also have serious consequences for the federal budget and taxpayers. Revenue collected by the federal gas tax funds the Highway Trust Fund and is used to pay for most road and highway infrastructure projects. The Highway Trust Fund, however, is prohibited from running a negative balance, so taxpayers must pay for any lost revenue caused by a federal gas tax holiday. Assuming a federal gas tax holiday starting July 1, 2022 and expiring August 31, 2022, the federal government (and the Highway Trust Fund) could lose between $9 billion and $13 billion, with more money lost if other federal motor fuel taxes are waived as well.[1] That lost revenue will inevitably be paid for by Americans in the form of higher deficits, higher taxes down the road, or less investment in transportation infrastructure.

If President Biden wants to truly combat high gas prices, he should focus on boosting American energy production and reducing government spending. President Biden should look at reversing his many policies that have curtailed energy production in America, such as the termination of the Keystone XL pipeline and suspending oil and natural gas leases. Right now, this proposal appears to be nothing but a political gesture. Unfortunately, a federal gas tax holiday will only lead to minimal short-term benefits for Americans, and potential long-term problems for the Highway Trust Fund and for gas prices.

[1] According to Bureau of Transportation Statistics (BTS) data, from 2018 to 2021 collected an average of $10.9 billion in federal gasoline and diesel taxes during the months of July, August, and September. Collections during these three months ranged from $8.9 billion in 2018 to $13.3 billion in 2021, though the pandemic may have distorted driving habits (and therefore federal gas and diesel tax collections) in 2020 and 2021. We use the range over the prior four years as our estimate for how much money the Highway Trust Fund could lose with a three-month federal gas tax holiday. The White House estimated the revenue loss would be $10 billion.