Here’s Why a Gas Tax Holiday Isn’t as Great as It Sounds

·6 min read
Money; Gerry Images
Money; Gerry Images

About $3 a week. Maybe $5. That’s how much money you can expect to save at the pump if there is a federal gas tax holiday — which leaders in Congress and the White House have been discussing.

The national average for regular gas prices is $4.96 per gallon as of Tuesday, down 5 cents from the record high of $5.01 set last week. Even with that slight drop in prices, drivers are paying nearly $2 a gallon more than they were a year ago. And some forecasters say we might see gas prices topping $6 around the country this summer.

Combine persistently high gas prices with the sky-high general inflation that’s causing hardships for many Americans, and it’s easy to see why the Biden administration has hinted it might support a suspension of the federal gas tax. On Monday, President Joe Biden told reporters that he is currently considering a gas tax holiday, and that he would make a decision by the end of the week.

The federal tax on a gallon of regular gas is 18.4 cents. So, in theory, if the federal gas tax was suspended, you’d pay roughly 18 cents less for every gallon you pumped.

Considering that gas costs an average of about $5 a gallon now, that would amount to a savings of less than 4%.

Here’s another way to look at it: If you have a 20-gallon gas tank, you could save about $3.60 with each fillup if there are no federal taxes — and if gas station prices actually reflect the full tax suspension. (Because gas prices fluctuate quickly and are based on many complicated market factors, it’s often assumed that drivers will not benefit fully from the disappearance of gas taxes.)

How much you’d actually save from a gas tax holiday would also vary widely based on how much you drive and your car’s gas mileage.

Patrick De Haan, head of petroleum analysis at the gas price-tracking app GasBuddy, said on Twitter that based on average consumption levels, the owner of a pickup truck could save $5.52 per week if there is a federal gas tax holiday. People with more fuel-efficient vehicles would save less: $3.68 a week if you drive a minivan, $2.94 for full-size cars and just $2.21 for compacts. Still, collectively, U.S. motorists could save $70 million a day during a federal gas tax holiday, according to De Haan.

For another idea of how much drivers might save, earlier this year the Penn Wharton Budget Model from the University of Pennsylvania estimated that a 10-month federal gas tax holiday would lower average per capita gas spending a total of $16 to $47.

Why are gas prices so high?

Consumer gas prices always take their cue from global oil prices. According to the U.S. Energy Information Administration, wholesale crude oil prices account for 60% of what American drivers pay at the pump for regular gas. Costs related to refining oil, distribution, marketing and taxes (state and federal) make up the remaining 40%.

U.S. gas prices rose last fall due to a mix of rising demand and insufficient supply — stemming largely from big cuts in production during the early months of the pandemic. It was expected that gas prices would drop in the winter. Instead, global oil prices soared after Russia — one of the world’s biggest oil producers — invaded Ukraine, and then consumer gas prices rose at the fastest pace ever recorded.

Prices retreated slightly in the early spring, but demand remained strong and by mid-May every state in the country was averaging over $4 a gallon. Prices kept creeping higher until the national average topped $5 last week, a cost that likely led some Americans to stop driving altogether — making the price of gas drop slightly.

“The recent high prices may have led to a small drop in domestic gasoline demand as fewer drivers fueled up last week,” AAA spokesperson Andrew Gross said in a news release Tuesday.

GasBuddy’s De Haan said in a blog post that the national average could drop another 15 to 30 cents by July 4. “I’m hopeful the trend may continue this week, especially as concerns appear to be mounting that we may be on the cusp of an economic slowdown, putting downward pressure on oil,” he said. But it’s impossible to accurately predict where oil and gas prices are heading.

Is a gas tax holiday a good idea?

The argument to suspend the federal gas tax is simple: It could save drivers some money.

A handful of states have already suspended their own gas taxes this year, and drivers reaped the benefits almost right away. For example, after Connecticut dropped its gas tax, the state saw the largest price drop in the country, with its average decreasing 28 cents in one week.

There are many critics who are against a federal gas tax suspension. When gas tax holiday proposals surfaced earlier this year, the non-profit Tax Foundation said that “reducing or eliminating the gas tax would exacerbate inflation” in general, and that it wouldn’t do anything to help boost the supply of oil or help lower oil prices. An analysis from the Urban Institute, a nonprofit focused on upward mobility and equity, said that a gas tax holiday “could do more harm than good in the long run” because it would decrease revenues collected for road improvements and other infrastructure projects.

Gas prices and the possibility of gas tax holidays have become highly charged political topics as well.

Republicans, who usually welcome tax cuts, are largely opposed to a suspension of the federal gas tax and strongly imply that Biden and Democrats are only considering the move because this is an election year.

Larry Summers, the former Treasury Secretary under President Clinton and director of the National Economic Council for President Obama, also criticized the possibility of gas tax suspensions this past weekend. “I’m no fan of the gas tax holiday,” Summers said on NBC’s Meet the Press. “I think that’s kind of a gimmick, and eventually you have to reverse it.”

Bear in mind that, not that long ago, it was more common for political and business leaders to focus on the possibility of increasing the federal gas tax. After all, the federal tax for regular gas has remained stuck at 18.4 cents per gallon since 1993 — and general inflation is up over 100% since that time.

Just last year, a bipartisan group of lawmakers endorsed a report that promoted upping the federal gas tax as one way to raise funds for improvements to transportation networks and broadband access.

At that time, however, the national average for a gallon of regular gas was only about $2.75.

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