The Biden administration has come up with some impressively awful economic ideas in the past year, most notably the push to pump an additional $1.75 trillion via the Build Back Better bill into an already overheated economy. Further evidence is its current proposal to suspend the federal gasoline tax for three months.
The motivation for the gas tax holiday is to help families cope with prices that have climbed from an average of just over $3 per gallon in July of 2021 to close to $5 today. This is putting a big squeeze on budgets, and is forcing people to rethink how much they drive. High gas prices may also push people to cut back on other spending, including summer vacations.
But the gas tax will do little to ease Americans’ pain at the pump. To begin with, the federal gasoline tax is only 18.4 cents per gallon. That’s less than 4% of the current average gasoline price, or in other words, a rounding error. Assuming that consumers get two-thirds of the cut, and pay a whopping 12 cents less per gallon, this is still only about two bucks a tank — not necessarily enough to buy a cup of coffee or a dozen eggs these days.
The part of the cut that goes to consumers is so small because basic economics says that whenever a tax like this is cut, the cut is split between the sellers of the product and the consumers. While the price of gasoline falls as gas stations begin to pass some of the tax savings on to consumers, consumers also react to the fall in gasoline prices by purchasing more. This puts some upward pressure on prices that keeps them from falling by the full amount of the tax cut.
On top of that, we’ve seen gasoline prices change by more than 12 cents per gallon multiple times in just the last four months. So one more week’s increase in gas prices could wipe out most or all of the benefit of the tax cut.
Who will actually reap most of the advantages from this tax cut? That’s simple: The people who can afford to keep buying gasoline. The dirty secret of most energy subsidies is that they disproportionately benefit the wealthy, because rich families can afford to keep buying fuel even when it becomes expensive.
Low-income families have to change their behavior, because the subsidies are never enough to make energy affordable for them. They’ll do whatever they can to reduce the amount of gasoline they need to buy, even if it means walking miles to get to work or do food shopping. Meanwhile, wealthy families keep driving but get to pay a bit less. This is why energy subsidies are among the least beneficial tax policies for low-income households that a government can implement.
And if you think that the gasoline tax is free money from the government, then think again. Most of the revenues from gasoline taxes go to the maintenance and improvement of our roads and bridges. It’s well known that America has for decades underinvested in its highways — and obvious if you’ve actually been driving on them — because gasoline taxes haven’t produced enough revenues. A gasoline tax holiday that benefits each of us individually by a mere $2 per tank costs billions of dollars in aggregate, money that should be invested in filling potholes and shoring up rickety bridges and overpasses.
Forgoing this money — which the new infrastructure spending plan is not enough to compensate for — means that poor road and bridge conditions will cause worse delays and even accidents. We’ll all pay for the cut in the gasoline tax by sitting in miles-long traffic jams when buckled interstate lanes get shut down, or while waiting at the auto mechanic’s to replace tires blown out by bad roads.
At the same time, the tax holiday does nothing to address the root causes of the gas spike. Prices have risen in part due to Russia’s invasion of Ukraine, which led Western countries to stop buying millions of barrels of its oil per day. And America’s refineries haven’t resumed their pre-pandemic levels of production, further tightening supply and increasing prices. Changes in the gasoline tax won’t increase oil production or refining.
Worse yet, the gas tax cut would weaken the only real solution to high fuel prices — the profit motive. Every previous surge in gasoline prices has been met with increased exploration, drilling, pumping and refining. In other words, high prices incentivize the producers of gasoline to increase their supply, in order to take advantage of the fat but fleeting profits they can earn by satisfying demand at higher than normal prices. The extra production from many oil companies then drives prices back down. This has been the pattern in every decade since the 1970s.
This time around, the Biden administration has been throwing obstacles in the way of drilling and refining, so the profits need to be even higher to justify investments into boosting production. And the White House is pressuring the fuel industry to pass the full reduction in any gasoline tax break on to consumers. Again: a barely noticeable reduction for each of us individually, but billions of dollars of lost revenue to producers.
All these actions dull the incentives to explore, drill, pump and refine, so there isn’t very much enthusiasm on the part of energy suppliers to increase supply even in the face of historically high gas prices. This is astounding to anyone who is familiar with the oil and gas markets and shows just how hostile the Biden administration has been to domestic fossil fuel production.
Cutting the gasoline tax is one of those policies that sounds great at first, but the more you understand how it works, the worse it looks. It won’t help anyone that much, let alone the people who are suffering the most from higher gas prices. It will make our roads and bridges worse by starving them of funds for repairs. And it will discourage the people who actually have the power to make the situation better from taking action. Please, President Biden, drop this proposal and take the rest of the summer off.