Why the Gas Tax Holiday Might Not be the Best Solution to Inflation

By Natalie Packard.

Gas prices across the nation have been at a record high for the past several weeks. Inflation has been sharply rising for months, spiking as the U.S. cut off Russian oil imports after Russia’s invasion of Ukraine. In response to taxpayers’ frustration about the $4.33 gas price average, Arizona Senator Mark Kelly introduced the Gas Prices Relief Act of 2022 on February 9th to temporarily suspend the federal gas tax until January 1, 2023. Arizona Representative Tom O’Halleran introduced companion legislation to the House of Representatives.

Gas Prices Relief Act

The federal gas tax is currently 18.4 cents per gallon. The revenue goes to the Highway Trust Fund and pays for much of the federal transportation spending. Senator Kelly’s bill would require the cuts to go directly to consumers, rather than oil and gas companies, ensured by the Secretary of the Treasury’s supervision. Additionally, the lost tax revenue to the Highway Trust Fund would be replaced with money from the general fund.

Would Consumers Really Save Money?

Senator Kelly believes the bill would provide “an opportunity . . . to save Americans money,” but several economists believe this result to be overstated. According to estimates from the Penn Wharton Budget Model at the University of Pennsylvania, the savings from a federal gas tax suspension would not likely be significant for consumers. They found that a gas tax holiday from March to December of this year, with gas otherwise at $4.20, would lower average gas spending by approximately $50 per person for the whole year.

Part of the reason for the minimal savings is because federal taxes make up a small portion of what consumers spend on gas. About 56% of gas prices are accounted for by the cost of oil. Refining costs account for 14%, distribution and marketing costs account for 15%, and the remaining 15% is accounted for by state and federal taxes.

Furthermore, many economists believe that the oil producers, and not consumers, will benefit from the savings. Gas tax holidays in the past have not lowered the price of gas by the full amount of the tax because producers bear some of the tax burden, so some of the savings flow to these companies. Senator Kelly included in the bill that the producers would not get these savings, but he did not provide guidance on what the Secretary of the Treasury would specifically do to enforce this.

The Impact on Infrastructure & Budget

Another critique is the negative impact the gas tax holiday would have on infrastructure projects funded by the Highway Trust Fund, which is why the American Automobile Association, American Association of State Highway and Transportation Officials, and the American Society of Civil Engineers oppose the proposed legislation. Without the tax suspension, the Highway Trust Fund’s revenue stream is expected to be more than $42 billion, over three-fifths of which will come from the federal gas tax. The federal gas tax suspension would decrease the Highway Trust Fund’s revenue by $20 billion, cutting the funding for this year nearly in half. Thus, the bill could delay much needed repairs or other important infrastructure projects from being completed.

While the proposed budget may reduce gas prices slightly for consumers in the short-term, some economists are concerned about the long-term impact on the federal budget. The Highway Trust Fund is at risk of insolvency in the very near future. Limiting the revenue widens the gap between incoming revenue and spending at a time when the focus should be on closing the gap. Because of the substantial dip in revenue that the federal gas tax holiday would cause, it seems unlikely that a one-time general revenue transfer could make up the difference.

Furthermore, the American Road and Transportation Builders Association believes this gas tax suspension could “establish a precedent that the federal gas tax should be suspended during times of economic distress or when fuel prices are deemed too high,” which would “surround the largest single source of revenue for federal highway and public transportation investment with disruptive uncertainty.”

Reduced Incentives for Fuel-Efficient Vehicles

Some environmentalists are concerned that lowering gas prices will reduce incentives to invest in fuel efficient motor vehicles. However, if the savings caused by the federal gas tax suspension to consumers are minimal, this reduced incentive to drive energy-efficient motor vehicles likely would not occur.

Is it All Politics?

The politics are also complicated. Senator Kelly and the other five senators joining him in proposing the legislation are facing reelection this year, and it is expected that some of these senators will have a tough time retaining their seats. As such, some opponents point to this bill as nothing more than a “political cover” to secure votes. Furthermore, this tax is intended to be temporary, and will therefore need to be reinstated eventually. The risk of political backlash may impede the reinstatement.

Overall, while inflation is a very real problem that needs to be addressed, it does not seem like a federal gas tax holiday is the best answer. The lack of potential benefits to consumers coupled with the potential long-term economic and budget concerns are just some of the flaws in this proposal. Hopefully, though, this proposal will spark other legislation that addresses inflation in a more efficient manner.

"Gas Prices in Buenos Aires" by Diego3336 is marked with CC BY 2.0.