High gas prices are a bad problem; suspending the gas tax is a bad solution
In April 2021, the Federal Reserve prophesied that inflation would only be a short term problem and “disappear in a few months.” Yet here we are almost a year later with the highest inflation level in four decades, and no signs that inflation will ease anytime soon. Whether it’s more expensive groceries, higher monthly rents, or exorbitantly priced new and used cars, it feels as though everything is more expensive. Some of the toughest increases are concentrated in energy costs, and President Biden has not taken energy inflation seriously. He has proposed to raise energy taxes, end drilling on federal lands, and has stalled issuing new drilling leases — all measures that will exacerbate the pain Americans are feeling at the pump.
The Democratic rank-and-file may applaud Biden’s hostility toward the fossil fuel industry, but his policies are directly contributing to the rise in prices drivers are facing nationwide.
As misguided as the President’s policies are, some swing state Democrats up for re-election in November also have a misguided legislative proposal that they hope will lower gas prices. A group of moderate senators introduced legislation to suspend the federal gas tax through Jan. 1, 2023. While their legislation is well-intentioned, it is fundamentally flawed and can only be described as a short-term band-aid on a larger problem.
Economists are mixed on whether or not gas tax holidays actually lower gas prices. More than 300 economists, including six Nobel laureates, noted in a 2008 letter that “a tax holiday would provide very little relief to families feeling squeezed.” Economists note that a full suspension of the gas tax would not lower the price of gasoline by the full amount of the tax because producers bear some of the tax burden. In previous state-level gas tax holidays in Indiana and Illinois, researchers found that consumers don’t get the full benefit of the gas tax suspension; some of their savings flow to oil producers.
A suspension of the gas tax might result in some level of short-term price reduction, but the long-term impact on the federal budget could be significant. The gas tax used to be one of the most efficient user fees imposed by the federal government: Drivers would pay at the pump, and that money would be used to restore roads that those same drivers use on a daily basis. Revenue derived from the federal gas tax, currently imposed at a rate of 18.3 cents per gallon, flows into the Highway Trust Fund (HTF) and is used to pay for most road and highway repairs. This bill might delay much needed repairs or other critical infrastructure projects from being completed.
Without tax revenue being deposited into the HTF, this bill would ask all taxpayers to shoulder the burden of making the fund whole through general fund transfer payments. Since the HTF is prohibited from running a negative balance, taxpayers would need to offset any foregone revenue, which the Center for a Responsible Federal Budget calculates to be $20 billion. CRFB notes that “while the gas tax holiday may reduce prices at the pump, it will further increase demand for gasoline and other goods and services at a time when the economy has little capacity to absorb it. The result could be even higher rates of inflation in 2023.”
Enactment of a gas tax holiday would also hasten the demise of the fund, which is set to be insolvent in five years. On both sides of the balance sheet, the HTF faces a series of challenges, which the Congressional Budget Office estimates will lead to cumulative deficits of $189 billion over the next decade. Lawmakers should focus on closing that significant budget gap instead of proposing ways to exacerbate the problem, even if it is “paid for” using one-time general revenue transfers.
Americans everywhere need relief from energy inflation. If lawmakers want to get serious about bringing down gas prices, they should focus on promoting energy production of all types and addressing the government’s mind-boggling spending problems. The gas tax holiday is nothing more than a short-term gimmick that would benefit the interests of incumbent politicians running for reelection rather than benefit their constituents. Suspending the gas tax might be good politics, but it certainly isn’t good public policy.
Thomas Aiello is the director of federal affairs for the National Taxpayers Union, a nonprofit dedicated to advocating for sound tax and fiscal policy at all levels of government.