The pros and cons of a gas tax exemption

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Seeking to combat record gasoline prices nationwide, President Joe Biden has called on Congress and states to enact gasoline tax holidays.

In Remarks on June 22, Biden called on Congress to suspend the federal gas tax for 90 days. Such a decision would reduce prices at the pump by 18 cents per gallon for gasoline and 24 cents per gallon for diesel. At the time of his remarks, gasoline prices were hovering around $5 per gallon.

Patrick De Haan, head of oil analysis at GasBuddy, valued that a three-month tax holiday would save pickup truck owners $66.24 and compact car owners $26.52, the savings for vehicles such as SUVs, minivans and full-size cars falling between those numbers.

Biden also urged states to follow suit by suspending their own gasoline taxes, which range from 15 cents per gallon to 68 cents, depending on the state.

Biden said he knows it won’t lower gas prices as much as Americans would like, but he asked Congress to act because “it will give families immediate relief, just a bit of respite.” , as we continue to work to drive down long-term prices.”

Comments from leaders on both sides were less than enthusiastic. The second Senate Republican, John Thune of South Dakota, said the proposal ‘died on arrival’ in his chamber while House Speaker Nancy Pelosi, D-California, released a statement neither applaud nor condemn the tax break. Sen. Tom Carper, D-Del., tweeted that Biden should “explore other options”.

Meanwhile, a chorus of swift criticism came from a wide range of economists. The benefits of a tax holiday would be minimal, they said, and would not necessarily benefit consumers.

“For a 10-gallon fill, that’s $1.84 saved,” said Clark Williams-Derry, energy finance analyst at the Institute for Energy Economics and Financial Analysis. “It’s not nothing, but it’s not a big dent in the family budget either. And it’s not even bringing gas prices back to where they were. a month ago.”

Calling it a “terrible idea,” Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, wrote that the policy would promote several undesirable consequences.

Some examples:

Increased consumption at a time when supply is low. This could eventually increase prices.

If you lower the relative price of gasoline, people are more likely to drive more, although it’s hard to predict exactly how much, said Alex Muresianu, federal policy analyst for the Tax Foundation.

And as refineries “operate at more than 95% capacity, an increase in demand that might be caused by lower prices will not necessarily be met by an increase in supply”, said Hugh Daigle, associate professor. in oil and petroleum. geosystems engineering at tthe University of Texas at Austin. “So, in fact, gasoline prices could actually go up, counterintuitively.”

This price increase could “ripple through the rest of the economy” because the cost of gasoline feeds into the price of many other products, said Marc Goldwein, senior vice chairman of the Committee for a Responsible Federal Budget.

And rather than savings for consumers, it could potentially improve the bottom line for the oil industry. There are no mechanisms in place to prevent companies from taking a cut of the savings, Gleckman wrote.

Some road projects depend on funding from gas tax revenues. A tax holiday could interrupt this work.

A gas tax exemption could reduce federal revenue by billions of dollars. While Biden has called on Congress to find other sources of revenue to fill the hole in the Highway Trust Fund, that could require increased federal borrowing, which would increase federal interest costs. It would also come at a bad time, as infrastructure improvements are part of the solution to the supply chain problems that are driving headline inflation, Gleckman wrote.

This could discourage consumers from saving gas.

Although painful in the short term, rising gas prices can have the advantage of encouraging positive behavior. Gleckman wrote that according to some studies, for every dollar of increase in gasoline prices, gasoline spending decreases by 27% to 37%, primarily due to a reduction in the number of kilometers traveled. This can reduce carbon emissions and give consumers another reason to choose vehicles with fuel efficiency in mind.

Given those trade-offs, “economically, I don’t think there are a lot of good arguments” for a federal gasoline tax exemption, Muresianu said.

The cost-benefit analysis of state gasoline tax exemptions is a bit different, as state gasoline taxes tend to be higher and therefore should yield more direct benefits.

If states follow a federal gasoline tax exemption, “it’s not impossible that some states will see fuel prices $1 a gallon lower than their 2022 peak, with wholesale prices also falling recently “, said De Haan. tweeted.

Some states have already experimented with gasoline tax holidays. Maryland imposed a gasoline tax holiday in March that reduced 36.1 cents per gallon of gasoline and 36.85 cents per gallon of diesel. Georgia also imposed a gasoline tax holiday, lifting a 29-cent tax on fuel and a 32.6-cent tax on diesel fuel.

“A state-level gasoline tax exemption would have a greater effect on gasoline prices than a federal tax exemption almost anywhere,” Daigle said. However, he said, a greater saving on the price would increase the increase in gasoline consumption and, in turn, increase the impact on inflation.

And as with the federal gasoline tax, not all of the benefits would necessarily accrue to consumers. A Penn Wharton analysis found that the tax cut reduced gas prices for Maryland drivers by an average of 26 cents, with about a third of the savings going elsewhere, including the oil industry.

The reality, experts say, is that Biden (and Congress) have few levers to affect gas prices.

“Oil and gasoline prices in the United States are set by markets, not politicians,” Williams-Derry said. “When Congress ended the oil export ban in 2015, we essentially fully integrated our oil markets into the global market, which means that decisions by hostile foreign powers have an immediate and direct effect on the markets. American fuel.”

The Biden administration has already tried or offered some of the levers available to it, including releasing oil from the Strategic Petroleum Reserveexpansion oil leasing on federal lands and implementing a gasoline tax exemption, Williams-Derry said.

Another option would be to encourage greater oil production, including through hydraulic fracturing, which could provide the fastest turnaround time, Goldwein said. But increasing oil production runs counter to Biden’s campaign promises to switch to clean energy.

Biden is also engaged in diplomacy. His upcoming trip to Saudi Arabia could lead to increased production, which could help lower global crude oil prices, Finley said. In addition, “diplomatic contacts with China could lead to more refinery processing for the global market, which could help ease the difficult situation in global refining,” he said.

Longer-term initiatives to encourage energy diversification are also worth exploring, even if they cannot change the immediate spike in gasoline prices, Daigle said. “That could include things like extending or increasing tax breaks for electric vehicle purchases and building car charging infrastructure,” Daigle said.

Meanwhile, Goldwein said Biden could use his bully pulpit to encourage Americans to drive less, including working from home more, as the pandemic has shown it’s doable for many workers. States could also temporarily subsidize public transit costs, he said.

“You can’t go from $5 to $4 gas that way,” he said. “But neither does a gas tax holiday.”

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