A three-month federal gasoline tax exemption aimed at reducing the cost per gallon is next on the agenda to be proposed to Congress by the Biden administration.
President Joe Biden has affirmed the need to pass a three-month suspension of the federal gas tax to contain rising fuel prices. The tax holiday would temporarily halt the 18.4-cent federal tax levied on each gallon.
For the measure to pass, it will require congressional approval, with lawmakers from both parties reaching a joint agreement on the implementation of the tax holiday. Some economists also believe that the gas tax holiday will not necessarily have the expected price impact on the consumer.
A gas tax holiday would give American drivers a small discount at the pump at a time of record fuel prices. The federal tax is 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel.
"*" indicates required fields
Eliminating the federal gas tax would represent approximately a 3.7% discount from a gallon to $5, although it remains to be estimated how much of these savings would actually reach the consumer’s pockets.
The federal gas tax has remained unchanged since 1993, and a waiver would have to be approved by the entire U.S. Congress. According to the Biden administration’s own estimates, a gas tax holiday would cost the country approximately $10 billion, funds that are mostly used to invest in road infrastructure.
Biden has asserted that the revenue lost from the tax holiday could be replaced by other sources without affecting investment in the nation’s transportation infrastructure.
How much would the federal gas tax holiday lower the cost per gallon?
Unfortunately for Biden, the gas tax holiday does not mean that American consumers will automatically save 18.4 cents on a gallon of gas; there are several factors that influence the price of fuel that could erase the discount.
Much of the price reduction will go into the supply chain, which will have to oversupply to meet the increased demand that will come from the discount at the price per gallon.
With a perceived reduction in the price of gasoline, the American driver could be encouraged to drive more or put a few more gallons in the tank, and that increased demand could end up erasing the price discount in whole or in part.
A study conducted by the Wharton School of Business at the University of Pennsylvania that followed the states of Maryland, Georgia, and Connecticut, which suspended their state gasoline taxes, is helpful in understanding how the U.S. would react to Biden’s proposed tax holiday.
On March 18 the State Gasoline tax of 36 cents per gallon was abolished in Maryland. However, the reduction its citizens saw in the price at the pump was 26 cents. Once the measure ended on April 17, the price of gasoline rose even higher than its price before the tax holiday.
Georgia established a 29-cent gallon tax holiday for 10 weeks, beginning on March 18. By March 24 the price of gasoline at the pump was down just 7 cents, but by May 24 the price per gallon was down as much as 30 cents.
Gasoline prices also dropped immediately after the 25-cent tax exemption on a gallon of gasoline went into effect in Connecticut from April 1 through June 30. The gallon decreased by as much as 23 cents by April 15. However, the decline slowly slowed to only about 14 cents by May 16, and the price of gasoline has continued to rise since then.
According to case studies analyzed by the University of Pennsylvania’s business school, the American driver receives 72% of the tax break in Maryland, about 58% to 65% in Georgia, and 87% in Connecticut.
The experiment in all three states shows that while a gas tax holiday does, in effect, temporarily lower the cost per gallon at the pump, the subsequent increase in demand could gradually erase the price discount.
The case of Connecticut is especially exemplary, because if the measure passes, some states will see little or no immediate price decrease, and by the time the tax holiday kicks in, gasoline price increases resulting from the laws of supply and demand may have eaten away at the artificial discount in the cost per gallon.
Although Biden insists on the need for a tax holiday on a gallon of gasoline, the price will continue to rise in the country because of years of minimal investment in infrastructure for the exploration, exploitation and processing of hydrocarbons sponsored by the Democratic Party and the current administration. Until America closes that investment gap caused by the climate lobby, gasoline prices will continue to rise.