President Biden has called for a three-month federal fuel tax holiday to help alleviate the pain of record gasoline and diesel fuel prices. But it faces and uphill battle in Congress, and critics say it could even backfire.

On June 22, the president called on Congress and states to take legislative action to provide relief from what the White House is calling “Putin’s Price Hike.”

Biden wants Congress to suspend federal gas and diesel taxes for three months, through September. He is calling on states to take similar action, whether that’s suspending their own fuel taxes or finding other ways to provide relief.

Right now, the federal fuel tax is 18 cents per gallon of gasoline and 24 cents for diesel. Those taxes go into the Highway Trust Fund, which pays for roads, bridges, and other infrastructure.

American Trucking Associations President and CEO Chris Spear criticized Biden's proposal, saying in a statement, “After months of touting the passage of the well-funded Infrastructure Investment and Jobs Act — a much-needed investment in our nation’s roads and bridges — the Biden administration wants to cut that same highway system’s primary source of funding with a suspension of the federal fuel tax.”

The Truckload Carriers Association also issued a statement, noting that “implementing federal or state gas tax holidays would significantly starve the Highway Trust Fund of much-needed financing and directly undermine industry and policymakers’ ability to implement the newly-won infrastructure law.... the Highway Trust Fund is already facing expanding structural deficits and needs greater investment moving forward. Instead this policy would erode the funding we need to rebuild our nation’s roads and bridges.”

But Biden said he wants to offer a tax holiday in a way that won’t take money away from the Highway Trust Fund.

“Those taxes fund critical highways and public transportation, through the Highway Trust Fund,” said a White House fact sheet. But this is a “unique moment,” it says, and the fuel-tax holiday would give consumers “a little extra breathing room as they deal with the effects of Putin’s war in Ukraine.”

“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 fact sheet.

The administration has acknowledged in recent weeks that there is not much the White House can do to address soaring fuel prices. Some of the few actions available to the executive branch, such as releasing oil from the Strategic Petroleum Reserve, haven’t provided much relief.

Biden also called on state governments to address the issue, citing as examples Connecticut and New York temporarily suspending their gas taxes, and Illinois and Colorado delaying planned tax and fee increases.

Fuel-Tax Holiday Faces Uphill Battle

Both Republicans and Democrats have pushed back on the idea of a fuel tax holiday, pointing out potentially negative impacts to the Highway Trust Fund. Oil-industry watchers question how much of the tax would actually get passed on to consumers. And some economists worry it could backfire, pushing fuel prices and overall inflation higher.

Sen. Tom Carper (D-Del.) said in a tweet that “suspending the primary way that we pay for infrastructure projects on our roads is a shortsighted and inefficient way to provide relief.”

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.”

Even President Barack Obama criticized a gas tax holiday as a “gimmick” on the campaign trail in 2008, when opponents Hillary Rodham Clinton and John McCain were calling for similar gas tax holiday.

“We're arguing over a gimmick that would save you half a tank of gas over the course of the entire summer so that everyone in Washington can pat themselves on the back and say they did something," said Obama during a 2008 campaign rally. “Well, let me tell you, this isn't an idea designed to get you through the summer, it’s designed to get them through an election.”

Amos Hochstein, senior adviser for energy security at the State Department, pushed back on that in an interview on CNN’s “New Day.”

“In the conditions that we are in today, that’s not a gimmick, that’s a little bit of breathing room for the American people as we get into the summer driving season.”

Would a Gas Tax Holiday Help — or Hurt?

There’s also skepticism about how much suspending the federal fuel tax would really affect the price 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 18.4-cent reduction would be pocketed by [oil] industry — with maybe a few cents passed on to consumers.” He predicts that consumers would at most get one-third of the benefits.

Whatever you thought of the merits of a gas tax holiday in February it is a worse idea now. Refineries are even more constrained now so supply is nearly fully inelastic. Most of the 18.4 cent reduction would be pocketed by industry--with maybe a few cents passed on to consumers.

— Jason Furman (@jasonfurman) June 21, 2022

On top of that, Furman and other economist contend that the artificial drop in fuel prices could just make the situation worse. Lower prices could prompt consumers to buy more gasoline, especially if more states follow suit, said Gas Buddy’s Patrick De Haan in a tweet. Lower prices 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,” and driving prices higher.

It could even make the overall inflation situation worse. Consumers, who have been cutting back on purchases, would go back to buying more. Economists say a fuel-tax holiday could act as a stimulus at a time when the government is trying to slow spending to curb inflation.

Are Oil Companies to Blame for High Prices?

Although President Biden has largely blamed Russia’s invasion of Ukraine for skyrocketing prices, fuel prices had already been trending higher before then, largely due to aftereffects from global COVID-19 pandemic lockdowns in 2020.

Oil production plummeted in response to the bottom dropping out of demand. Then demand for fuel rose as lockdowns ended and commuters started returning to offices. The oil industry has not been able to get oil and refining production up to necessary levels since then. It’s a matter of global supply and demand driving prices.

However, some critics, including Biden, say oil and gas companies could do better and are taking advantage of the situation to rake in record profits.

The oil industry has largely said that it is the Biden administration’s fault that prices are so high because of what they perceive as limits on domestic oil and gas production.

In remarks Tuesday, according to published reports, Biden said, “This idea that they don’t have oil to drill and to bring up is simply not true. This piece of the Republicans talking about ‘Biden shut down fields,’ wrong. We ought to be able to work something out whereby they’re able to increase refining capacity and still not give up on transitioning to renewable energy. They’re both within realm of possibility.”

Biden has directed Energy Secretary Jennifer Granholm to hold an emergency meeting on the issue as well as engage with the National Petroleum Council. Biden asked the oil companies to provide Granholm “an explanation of any reduction in your refining capacity since 2020 and any concrete ideas that would address the immediate inventory, price, and refining capacity issues in the coming months — including transportation measures to get refined product to market."

In a letter to seven oil companies (Marathon Petroleum, Valero Energy, ExxonMobil, Phillips 66, Chevron, BP, and Shell), Biden urged them to take "immediate actions to increase the supply of gasoline, diesel, and other refined product.

“At a time of war – historically high refinery profit margins being passed directly onto American families are not acceptable,” the letter read.

Chevron CEO Mike Worth responded in an open letter to Biden that the administration should stop criticizing the oil and gas industry and instead work to change policies to promote continued investment in oil and gas rather than the “obstructive” approach the oil industry accuses the Biden administration of pursuing. “These actions are not beneficial to meeting the challenges we face and are not what the American people deserve.”

White House Considers Other Options

Biden and administration officials also have indicated the federal government is ready to use additional emergency powers to boost refinery capacity and output. The House of Representatives this month passed a resolution “urging the use of the Defense Production Act of 1950 to expand short-term refinery capacity” and provide targeted technical and financial assistance to restart certain idled refineries for a limited time.

That resolution said that while crude oil production is recovering to pre-pandemic levels, without enough oil refining capacity, there’s a bottleneck limiting the supply of fuel and keeping fuel prices elevated. Meanwhile, the “crack spread” — the profit margin between crude oil and refined fuels — has reached a near record high, but companies are not investing in new refining capacity in the United States.

“Here are three immediate things this administration and Congress can do that will actually make a difference,” said ATA’s Spear. “Make America energy independent… stop kissing the ring of Saudi Arabia. Renew trade agreements with the European Union and Asian Pacific nations in order to export more American oil and natural gas. And, balance the budget… stop wasting hard-earned taxpayer dollars on senseless programs that drive up inflation and runaway deficits.

“Energy independence, trade and a balanced budget. Do that, and America wins.”

Edited 5:40 p.m. to add TCA comment