Biden administration officials and Democrat senators are considering a suspension of the federal fuel tax in order to combat record inflation levels ahead of the Federal Reserve’s planned rate hikes. The proposition has received bipartisan pushback from legislators who are skeptical about the efficacy of a gas tax holiday.
According to the Tax Foundation, a Washington, D.C.-based think tank which collects data and publishes research studies on U.S. tax policies at both the federal and state levels, suspending the fuel tax would actually do more harm than good for surging prices.
“Cutting the gas tax makes gasoline relatively cheaper. Therefore, on the margin, people are going to be more likely to choose to drive instead of using some other mode of transportation (or not taking a trip at all),” Tax Foundation Federal Policy Analyst Alex Muresianu told Yahoo Finance. “That means higher demand for gasoline, which drives price increases.”
Economists are mixed on whether gas tax holidays actually lower gas prices due to the resulting spike in demand. However, a temporary suspension would likely have a serious impact on funding for the Biden administration’s infrastructure promises.
Muresianu also noted that although temporarily suspending the federal gas tax would be a smaller program than the March 2021 American Rescue Plan (ARP), it, like the ARP, would provide more fiscal stimulus than the gap between the economy’s current position and its potential.
“In the context of the whole economy, reducing or eliminating the gas tax would exacerbate inflation,” Muresianu wrote in his article. “Currently, demand in the economy, boosted by expansionary fiscal and monetary policy, far outstrips supply, plagued with its own problems driven by the COVID-19 pandemic and its effects.”
And while the proposed legislation states that consumers will “immediately receive the benefit of the reduction in taxes,” Muresianu is doubtful of the ability for Congress to enforce this piece of the bill. He pointed to studies suggesting that only around 70% of a gas tax suspension would be passed on to consumers in the form of lower prices, while oil companies would capture the remaining benefits.
Ignoring the structural issues
Muresianu believes the idea behind the gas tax holiday bill ignores the structural reasons behind rising gas prices, which he cited as being a mismatch between supply and demand.
Demand for gas has recovered to pre-pandemic levels as Americans are hitting the road once again—travel on U.S. roads rose 11.2% in December 2021 compared with December 2020—but domestic production has not yet recovered to 2019 highs. In addition, overseas pressures such as the ongoing Russo-Ukrainian War are adding on to the oil supply crunch.
In any case, Muresianu said that the expansionary fiscal policy in a suspension of the federal gas tax is “the wrong way to deal with inflation.” Instead, he believes policymakers should pursue structural reforms to encourage productivity growth and physical capital investment, thereby raising the economy’s long-term productive capacity, making supply chains more resilient to future shocks, and putting downward pressure on inflation.
“A particularly good policy in this case is full expensing for capital investment, which would make investment in say structures and machines fully deductible when they’re made, just like salaries and other day-to-day expenses,” he told Yahoo Finance. “This would make companies more likely to invest in things like additional warehouse capacity or transportation resources that make handling changes in demand easier. However, these kinds of effects would take a while to show up, so in the short term it’s mostly just letting the COVID-era stimulus wear off and not further raising the deficit this year.”
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV
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