A Federal Gas Tax Holiday Is A Terrible Idea

President Biden is proposing a three-month federal gasoline tax holiday. He may want to appear to be doing something to address high inflation, which is both an economic concern and a growing political problem for his Administration. But suspending the gas tax is a terrible idea that, on the margin, will make inflation worse, not better.

The impact of a federal gas tax holiday would be extremely modest. On average, a driver in the US uses about 600 gallons of gasoline annually. Suspending the 18.4-cent-per-gallon federal levy would save a typical driver less than $10-a-month. To put it another way, the federal tax represents about 3% of the cost of $5-a-gallon gasoline.

Biden also urged states to suspend their gas taxes. Because state levies often are much higher than the federal tax, the impact would be more significant and drive prices even higher. But since Biden has no ability to suspend state gas taxes, let’s stick with the federal tax.

While the effects would be small, almost everything about a gas tax holiday runs in the wrong direction. It would:

· Increase consumption at a time of low supply, thus driving up pre-tax prices and worsening climate change.

· Discourage consumers from purchasing more energy efficient vehicles.

· Provide a windfall to oil producers, the very companies Biden has been blasting for price gouging.

· Temporarily eliminate a key funding source for infrastructure improvements.

Let’s unpack a few of these issues:

Demand for gasoline. Gas prices skyrocketed in recent months because of a growing imbalance between oil supply and demand. Supply was constrained in part due to Russia’s invasion of Ukraine. At the same time, demand increased sharply as the COVID-19 pandemic receded.

While a tax holiday will lower the after-tax price of gas, that lower price will boost demand, worsening those supply shortages, and, yes, raising the pre-tax price. Any net benefit for drivers would be very small.

It is hard to know exactly how much the tax cut would affect driver behavior. Economists have long estimated that consumers barely respond to short-term changes in gas prices. They don’t drive less, and they don’t buy more fuel-efficient vehicles.

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