Biden’s gas tax holiday may not lower prices

Suspending the federal gasoline tax may sound like welcome relief for U.S. drivers paying some of the highest pump prices on record right as the summer travel season kicks into high gear. But experts warn it could bring mixed results — or even higher gas prices in the end.

On Wednesday, President Joe Biden issued a statement calling on Congress to enact a three-month federal gas tax holiday, blaming high prices and supply shortages on Russia’s war in Ukraine. If enacted, the move would waive the 18.4-cent national tax currently tacked onto each gallon of gasoline sold through September, and 24-cent-tax on diesel. Pegging the cost at $10 billion, Biden is asking Congress to find other revenues for the Highway Trust Fund. He is also calling on states and local governments to provide additional relief to consumers.

In total, that could save Americans about $70 million per day, said Patrick De Haan, head of petroleum analysis at GasBuddy, which tracks prices at 150,000 U.S. gas stations. National average gas prices are currently $4.97 a gallon, just shy of record prices recorded last week, according to auto-club AAA.

David Paul Morris/Bloomberg

But waiving the tax could bring some surprising consequences. In fact, when some states have opted to suspend their own fuel taxes in the past, sometimes prices come back higher than what they would have been had the tax-holiday never occurred, according to a study released last week from the Wharton School at the University of Pennsylvania.

That appeared to be the case in Maryland, which earlier this year experimented with a month-long gas tax holiday, temporarily waiving state taxes of 36.1 cents per gallon on gasoline and 36.85 cents per gallon on diesel. Although the study found that prices went down in the short term, they spiked after the tax holiday expired on April 17 — to higher than what they would have been without the tax holiday. 

Other states have also considered or enacted state tax holidays. New York suspended its 16-cents-a-gallon gas tax on June 1 for the rest of 2022. Georgia extended its 29-cents-a-gallon gas tax holiday through July 14. Connecticut is waiving its 25-cents-a-gallon gas tax through June 30. Florida has a 25.3-cents-a-gallon gas tax holiday planned for October. And although the deadline passed to suspend the July 1 gas tax increase in California, Governor Gavin Newsom has supported sending $400 to every registered vehicle owner in the state, capped at two checks per person. Several other states are currently evaluating some form of tax relief as well.

The Maryland tax holiday cost the state an estimated $100 million, according to local reports. A federal holiday’s impact would be even more severe. According to one February estimate, suspending the federal gas tax through the end of the year would have cost around $20 billion. With revenues from the federal fuel tax used to finance the Highway Trust Fund, losing that source of income could impact the ability to repair and maintain highways, critics warn.

One reason waiving fuel taxes to lower prices sometimes brings the opposite effect is because cheaper gas encourages more demand, in turn driving prices higher. 

“It could exacerbate the imbalances between supply and demand, which is one reason prices are already high,” De Haan said, noting that Americans are collectively spending about $722 million more every day compared to a year ago for gasoline. “Lowering prices could boost demand and constrain supply at a time prices are already high.”

If the federal gas tax were to be waived, it would be the latest in a series of moves intended to bring prices down, including releasing oil from the Strategic Petroleum Reserve, signing off on a less expensive ethanol-blended gasoline to be sold this summer and encouraging oil producers to pump more. The impact at the pump has so far been modest, though prices have been inching lower for more than a week. 

— With assistance from Paulina Cachero