What a Gas-Tax Holiday Won’t Do

Save anyone much money or improve Biden’s approval rating

An illustration of a gas pump
The Atlantic

Gas prices in the U.S. are close to $5 a gallon, President Joe Biden’s approval rating is 36 percent, and the first phenomenon has a lot to do with the second. But the factors that have driven gas prices higher are largely out of Biden’s control, at least in the near term. So it wasn’t a shock when he announced yesterday that he was asking Congress to suspend the 18.4-cents-a-gallon federal gas tax for three months. Even Biden doesn’t seem to think a tax holiday will make much difference—he said only that it would provide families with “just a little bit of breathing room.” Given how upset Americans are about the price of gas, though, he wants to be seen doing something.

But that’s the problem. Suspending the gas tax is essentially a political gimmick that’s bad on the economic merits and probably won’t yield much in the way of political benefit anyway, in part because everyone knows it’s a gimmick. (Nancy Pelosi called the idea “very showbiz” when it was floated earlier this year.) It’s not a disastrous proposal, because the federal gas tax is so small, relatively speaking, that suspending it isn’t going to make a huge difference either way. But it’s a proposal that will cause more problems than it’ll solve.

That’s true even if the gas-tax cut gets largely passed along to consumers. That’s not guaranteed: Refiners and gas-station owners could end up pocketing a big chunk of the savings. But a recent study by economists at the Wharton School at the University of Pennsylvania of gas-tax holidays in Maryland, Connecticut, and Georgia found that on average, about 70 percent of the tax cuts got passed along to consumers. Yet even if you assume the same will be true of a federal gas-tax holiday, that means consumers will save about 13 cents a gallon, which for the average car owner will add up to a grand total of about $20 over three months. That’s not nothing, but it’s a very small benefit, small enough that it’s not even clear consumers will really notice the savings or attribute any drop in the price of gas to the tax holiday. (Gas prices, after all, have dropped more than 13 cents in just the past week.)

And in exchange for that, what will we give up? To begin with, because the gas tax is a dedicated tax that funds highway spending, it’ll take an estimated $10 billion from infrastructure projects (which are one of the things it actually makes sense for the government to be spending money on right now). Congress would presumably appropriate money to make up the difference, but in effect we’d be adding $10 billion to the deficit at a time when inflation is above 8 percent.

A gas-tax holiday is also poorly targeted. The problem we face in the gas market now is limited supply, thanks both to geopolitical turmoil and to tight refinery capacity. Cutting the gas tax will obviously do nothing about supply, and, on the margin, will boost demand—exactly what we don’t need at the moment. And the largest benefits of a gas-tax repeal go, obviously, to people who drive the most, which means it acts as an incentive for people to drive more, not less.

Finally, there’s a more subtle problem with the idea. The federal gas tax, small as it is, is an acknowledgment that driving creates negative externalities—costs for the rest of society, non-drivers included—so it’s a way of getting drivers to internalize some small percentage of those costs. Suspending the tax weakens the link between the tax and the costs of driving, and makes the gas tax just another tool for generating revenue.

If Biden really feels the need to give low-income and working-class Americans some relief from high prices at the pump, there are better options. In fact, just sending out means-tested gas-price-relief rebate checks would be more sensible, because that would not directly encourage more driving, and would probably yield greater political benefit. And if he wanted to help people who have to drive for a living, he could have the IRS boost the mileage deduction (something it’s already done this year).

In the end, the argument for suspending the gas tax amounts to little more than saying, We must do something about gas prices. A gas-tax holiday is something. Therefore we must do it. That may be an understandable impulse, but it’s a bad way to make policy.