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TaxWatch: Would a federal gas tax holiday mean lower prices at the pump? Don’t bet on it, critics say

A proposal to pause the federal gas tax could be accelerating as the Biden administration and Democratic lawmakers consider how they can help cut household costs in a time of high inflation.

Days after several Democratic senators announced a bill that would put the 18.4-cent gas tax on hiatus during 2022, lawmakers were reportedly giving the idea some thought at a Tuesday lunch, the Washington Post reported.

But critics say they should be slamming the brakes instead. They doubt a tax holiday would translate into pump price relief for consumers while Ukraine-Russia tensions continue, the global supply chain remains snarled, and spring’s warmer weather will keep gas demand high in America.

“It’s just a horrible idea on every front,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, a non-partisan centrist think tank.

That echoes a barb from former Treasury Secretary Larry Summers, who was quoted in the Washington Post saying the idea of a gas tax holiday was “short-sighted, ineffective, goofy and gimmicky.”

The national average for gallon of gas was $3.49 as of Tuesday, according to AAA. That’s up more than a dime from a month ago and it’s a one-dollar increase from the $2.50 average price at the same time last year.

The overall cost of living rose 0.6% in January compared to December, marking a 7.5% year-over-year rise, according to the latest Consumer Price Index data. There was a 40% year-over-year price increase for gasoline, not seasonally adjusted, the Bureau of Labor Statistics data showed.

What is the federal gas tax?

The federal gas tax is an 18.4-cent per gallon levy that’s layered into the overall cost of a gallon of gas. The money from the federal tax goes to a trust fund for highways that could be running out of money by 2027 by some estimates. Congress hasn’t raised the tax rate since 1993. States have their own gas taxes, which help with state road costs. The Highway Trust Fund builds and maintains highways and bridges and also funds capital expenditures for public transit.

Florida Gov. Ron DeSantis, a Republican, has proposed a five-month pause on the state’s 25-cent gas taxes. State lawmakers sound skeptical, according to local reporting from WFSU.

The federal bill at issue, the Gas Prices Relief Act, would suspend the gas tax until Jan. 1, 2023 and authorize general fund transfers to keep the Highway Trust Fund solvent.

The Treasury Department would ensure “oil and gas companies pass along the savings at the pump to consumers,” according to an announcement of the bill co-authored by Sens. Maggie Hassan of New Hampshire and Mark Kelly of Arizona.

“People are feeling a real pinch on everyday goods, and we must do more to help address rising costs, particularly the price of gas,” Hassan said in a statement. “We need to continue to think creatively about how we can find new ways to bring down costs, and this bill would do exactly that, making a tangible difference for workers and families.” 

Hassan’s office did not immediately respond to a request for comment.

Federal and state taxes accounted for 18% of the cost for a gallon of gas in 2019, according to AAA data sourced from the U.S. Energy Information Administration. The top price component was crude oil, which contributed to 54% of the cost of a gallon in 2019.

“Over the past week and a half, we’ve seen oil prices rise sharply in response to tension in Russia and Ukraine,” said AAA spokesman Devin Gladden. “Right now, the main driver for gas price increases is the high cost of crude and the rapid rise in the cost of crude.”

On Tuesday, stocks jumped higher on the hope that the Russia-Ukraine stare down could end peacefully. The price on West Texas Intermediate crude for March delivery pulled back to under $91.

‘It’s hard to see the logic to this gas tax policy’

Gladden noted he wasn’t commenting on the specifics of any legislative proposals, but said “offering a holiday would offer no vacation from higher oil prices. It’s a solution that would not fit the problem at hand.” The timing could wash out any potential savings too, because increased travel during spring and summer traditionally send gas prices higher, Gladden noted.

Any sort of break on gas taxes is “not going to cause as big a price reduction as politicians hope,” he said.

It’s unclear what the future is for any federal gas tax halt, but the Biden administration has made other efforts to reduce pump prices, including the release of 50 million barrels of oil from the country’s strategic petroleum reserve.

That was a “very reasonable approach,” in Goldwein’s eyes. But he can’t say the same about a pause on the 18.4-cent federal gas tax. The pause would cost the government $20 billion in missed revenue, according to his organization’s estimates.

Drivers would “get a fraction of that relief” because gas retailers might pass along less than an 18.4-cent price cut to consumers, and it would ultimately feed into inflation, Goldwein said.

The money potentially saved on gas might free up cash that contributes to higher prices elsewhere, he noted. A gas tax pause doesn’t fit with goals to strengthen infrastructure or tackle climate change, he said. “It hard to see the logic to this gas tax policy,” he said.

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