Would a Gas Tax ‘Holiday’ Really Lower Prices at Pumps?

Gas prices are starting to drop from their recent highs and the Biden administration is hoping to lower them even further by pausing collection of the federal gas tax.

President Joe Biden asked Congress on Wednesday to enact a three-month “holiday” on the collection of the federal gas tax, which adds 18.4 cents to the price of each gallon of gasoline and 24.4 cents to each gallon of diesel fuel. Congress must act to suspend the collection of the tax, and Democratic legislators in the House and Senate have introduced bills but, so far, Republicans have not joined them.

“I fully understand that the gas tax holiday alone is not going to fix the problem, but it will provide families some immediate relief, just a little bit of breathing room as we continue working to bring down prices for the long haul,” Biden said in a statement on Wednesday at the White House.

Fuel prices have skyrocketed this year, driven up by inflation and the high cost of crude oil needed to make gasoline. Biden has also blamed the spike in gas prices on disruptions caused by Russia’s invasion of Ukraine, which prompted sanctions against Russia’s oil production. After crossing over the $5 threshold for the first time on June 11, the average price for a regular gallon of gas was $4.96 on Wednesday, marking eight straight days of falling prices.

Biden is also asking states to act at the local level. Several states have already enacted or proposed a form of gas tax relief, but every state has some form of tax on gasoline, and it can range from as low as 15.13 cents in Alaska to 68.15 cents in California.

It is questionable how much further the gas tax cut would drive down costs. Two recent studies gave a wide range of results. A Penn Wharton Budget Model study found that the three states that cut state-level gas tax collection this spring passed a tax saving onto consumers worth anywhere from 58% to 87%. But another study, funded by the American Road & Transportation Builders Association (ARTBA), found that consumers only saw a difference of 18% when gas taxes were suspended or changed.

Revenues from the federal gas tax go toward highway funding, which is why ARTBA opposes the gas tax holiday, and also why Biden called for Congress to replace the approximate $10 billion in revenue lost by suspending the tax. These concerns are why some economists are skeptical about whether a gas tax holiday will work. 

“Whatever you thought of the merits of a gas tax holiday in February, it is a worse idea now,” Jason Furman, former economic advisor to then-President Barack Obama, wrote on Twitter.

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