Diesel prices were climbing to new records, reaching an average of $5.718 per gallon nationwide as of June 13. Gasoline prices were in the same boat. But a temporary suspension of federal gasoline and diesel taxes is not the answer.
I’ve written before about why fuel prices are high, and David Cullen's recent Washington Watch column also goes into why the White House has limited power to do anything about it. Some of the few actions available to the executive branch that President Biden has implemented, such as releasing oil from the Strategic Petroleum Reserve, haven’t provided much relief. So it’s perhaps unsurprising that the president called on Congress to pass a three-month “gas tax holiday.”
It was seen as unlikely to happen, with pushback coming from both Republicans and Democrats, and from oil-industry observers and economists. Here’s why suspending the federal fuel tax is a bad idea.
1. It Won’t Help That Much.
Theoretically, not having to pay federal fuel tax would make a gallon of diesel more than 24 cents cheaper. Gasoline, 18 cents. But in reality, there’s no way to force those tax cuts to be passed through to the people buying the fuel at the pump.
Harvard professor Jason Furman, who was chairman of President Obama’s Council of Economic Advisers, said on Twitter that “most of the … reduction would be pocketed by [the oil] industry — with maybe a few cents passed on to consumers.” He predicted that consumers would at most get one-third of the benefits.
In addition, a tax holiday would do nothing to fix the underlying problems of supply and demand that have driven up prices for gas, diesel, and jet fuel.
2. It Could Backfire.
If the fuel-tax suspension did succeed in lowering prices at the pump, that could prompt consumers to buy more gasoline, not less, swinging the supply-demand equation the wrong way. High prices already have caused consumers to buy less fuel. People have been finding ways to drive less, such as consolidating trips to run errands, limiting the number of days they go to newly reopened offices, or using public transit.
And if states follow suit, said Gas Buddy’s Patrick DeHaan in a tweet, it could push demand higher, “exacerbating the imbalance between supply and demand at a very delicate time as supplies remain are low or very low in some areas.”
A gas tax holiday could even be inflationary. Economists say it could act at stimulus at a time when the government wants to slow spending to curb inflation. Having to spend less money on gas could heat up consumer spending in other areas.
Let’s look back to 2008, when we also saw unheard-of $5-per-gallon-plus fuel prices. What made them drop? The collapse of the financial markets and soaring job losses caused by the burst of the housing bubble pushed us into what would eventually be called the Great Recession.
Obviously, that’s not the way we want to see fuel prices come down.
3. Our Highways Need the Money.
Those taxes go into the Highway Trust Fund, which pays for roads, bridges, and other infrastructure.
Back in February, when talk of a gas tax holiday first started, Sen. Joe Manchin (D-W.Va.) said, “People want their bridges and their roads, and we have an infrastructure bill we just passed this summer, and they want to take that all away.”
Biden said he believed there is a way to suspend the tax without affecting the trust fund, but he was short on specifics. “With our deficit already down by a historic $1.6 trillion this year, the President believes that we can afford to suspend the gas tax to help consumers while using other revenues to make the Highway Trust Fund whole for the roughly $10 billion cost,” said the White House fact sheet.
Keep in mind, federal fuel taxes have not been raised since 1993.
In 2006, HDT’s cover story, “50 Years on the Interstate,” explored how the country would pay for infrastructure going forward. “We need a new approach and we need it now,” said former Transportation Secretary Norman Mineta. We’re still facing the same questions — 16 years later.
This editorial commentary first appeared in the July 2022 issue of Heavy Duty Trucking.