President Joe Biden asked Congress to suspend federal fuel taxes for three months to lower the price of gasoline and diesel, bringing him up to speed with a number of his fellow Democrats who backed a gas tax holiday in February before the war in Ukraine began.
The proposal wasn’t Biden’s first resort and came after he tried several other solutions to reduce prices, including ordering releases of several hundred million barrels of stockpiled oil and scaling back regulations on E15 gasoline, which is 15% ethanol.
Biden’s request to Congress followed consecutive weeks of new national gas price records. The current record, in nominal terms, of $5.016 per gallon was set on June 14. Prices have since fallen down to $4.94 per gallon on average as of Thursday, according to AAA.
Here are the details:
What did Biden ask for?
Biden asked Congress to pass a 90-day suspension of federal taxes on transportation fuel. The fuel taxes are levied on per-gallon basis, amounting to 18 cents per gallon of gasoline and 24 cents per gallon of diesel.
He also asked states to introduce similar tax holidays, which a number have already done in recent months, or offer relief payments to drivers.
What do the taxes fund?
The federal fuel tax revenues go toward the Highway Trust Fund, which funds highway and mass transit programs.
How much would the tax holiday cost the HTF?
The White House estimated that Biden’s ask would set the HTF back by around $10 billion.
Biden urged Congress to fill that hole and said higher federal tax revenues and deficit reductions could offset the loss in revenue to the highway fund.
Where are tax holidays in effect?
Several states have enacted their own gas tax holidays to help drivers deal with high fuel prices in recent months.
Maryland and Georgia led the pack, both enacting tax holidays on March 18. Maryland suspended its 36.1-cent gasoline and 36.85-cent diesel taxes through April 16. The taxes were reinstated on April 17.
Georgia passed and then extended its own tax holiday, which will be effective through July 14.
Connecticut suspended its tax on 25-cent-per-gallon gasoline tax on April 1, effective through June 30, while New York’s gas tax holiday runs through the end of the year.
Who supports tax holidays?
Support for gas tax holidays, and for state-level versions, does not cut cleanly on ideological lines.
Maryland Senate President Bill Ferguson and House Speaker Adrienne Jones, both Democrats, supported the state’s initial tax holiday but oppose its reinstitution on the grounds that it will take away money for transportation projects funded by the tax revenues.
“The Maryland General Assembly already did exactly what President Biden is proposing at the federal level,” Ferguson and Jones said in a statement after Biden went public with his request.
Virginia’s Democratic-led Senate just voted down a proposal endorsed by Republican Gov. Glenn Youngkin to suspend the state’s gas tax.
In Congress, eight Democrats backed Sen. Mark Kelly’s (D-AZ) proposal, introduced on Feb. 9, to suspend the gasoline tax through the end of 2022. Co-sponsors include Sens. Maggie Hassan (NH), Catherine Cortez Masto (NV), and Raphael Warnock (GA), all of whom are up for reelection in November.
Hassan called Biden’s proposal a “start” but stressed that she wants the tax suspension to run through the end of the year.
Other Democrats, including House Speaker Nancy Pelosi (CA), have questioned the effectiveness of tax holiday proposals. Rep. Jared Huffman (CA), a liberal Democrat, said “consumers will get no meaningful relief” from Biden’s proposal and that it will “just starve our highway trust fund of revenues.”
Former President Barack Obama famously called suspension of the federal gas tax a “gimmick.” In his 2020 memoir, Obama described his opposition to a tax holiday during his 2008 presidential campaign as “one of our prouder moments” for “taking a tough position without the benefit of polls and in the face of pundits who thought we were crazy.”
Some congressional Republicans, meanwhile, have dismissed Biden’s proposal as an election-year stunt that doesn’t address the underlying supply-and-demand fundamentals driving prices up.
Who would benefit?
The gas tax is imposed on producers, who then pass it on to consumers. Without the tax, the industry could raise prices as a result of the lower tax burden, as many drivers have little discretion in how much gas they buy.
Consumers would only reap the benefits of about 50% to 80% of the tax suspension, according to economic estimates cited in an analysis of Kelly’s proposal from researchers at the University of Pennsylvania. The rest of the benefits would accrue to the industry.
Biden pleaded with energy companies to pass on “every penny” of the suspended tax to drivers.
The UPenn analysis also found that, based on the assumption that it went into effect in March through December, it could have lowered average gasoline spending per capita by between $16 and $47.
What could other effects of a tax holiday be?
Biden said he wants to deliver relief to drivers ahead of the busy summer travel season, and fewer taxes portend lower prices.
At the same time, a number of analysts argue that a tax holiday would drive demand even higher during the peak summer driving season and make the fuel market even tighter, as it wouldn’t address the supply of crude oil or shortage of refining capacity, both of which Biden has recognized as factors underlying high prices.
“Lower prices would marginally boost demand ahead of the busy summer driving season, potentially pushing the market even more out of balance than it currently is as supply constraints remain a struggle,” said Claudio Galimberti, an analyst at Rystad Energy.
Garrett Golding, a business economist with the Federal Reserve Bank of Dallas, wrote in a recent research note that falling demand is likely the only short-term solution to high prices.
“Without an adequate supply response arriving in the near term from either crude oil production or refining capacity, demand destruction is likely the only variable that can eventually cause the fuel price surge to slow and reverse,” Golding said.