Just How Bad of an Idea Is a Gas Tax Holiday?

Economists and fiscal policy experts generally hate it, but not as much as they used to.
Florida Gov. Ron DeSantis stands in front of a sign that says LOWER GAS PRICES
Credit: SOPA Images / Contributor
Screen Shot 2021-02-24 at 3
Moveable explores the future of transportation, infrastructure, energy, and cities.

On April 30, 2008, Urban Institute fellow Len Burman went on PBS Newshour to discuss the hot topic of the day: a gas tax holiday to ease the burden of soaring gas prices. It was a presidential election year and all the major candidates were involved in the debate. Senators Hillary Clinton and John McCain proposed a federal gas tax holiday, temporarily waiving the 18 cents per gallon federal tax, under the theory it would please voters and save them a few bucks at the pump. 

Advertisement

Sen. Barack Obama was opposed on the grounds it would barely save people any money and only serve to pad oil company profits because they would simply take the 18 cents per gallon for themselves. He bolstered his argument by adding that as a state senator of Illinois in 2000, he had voted for a state gas tax holiday that got enacted, but it didn’t work.

"If Senator Clinton or John McCain had stood up in previous years for increases in fuel-efficiency standards, in getting serious about an energy policy that is freeing us from dependence on foreign oil, then we would not be in this same situation in the first place," Obama said in 2008.

Economists and tax policy experts were solidly on Obama’s side. So much so, in fact, that when Burman asked the PBS producer if there would be another guest on the show to support the gas tax holiday, the producer told him, “We tried, but we couldn't find anyone to argue the other side.”

The 2008 gas tax holiday never ended up happening, but like low-rise jeans, it’s back in fashion amid soaring gas prices due to lingering effects of the pandemic and market volatility following the Russian invasion of Ukraine. The Biden administration is reportedly considering one. Maryland Gov. Larry Hogan is working on one. And lawmakers in states around the country are at least throwing the idea out there

Advertisement

It’s too early to say whether any of these ideas will actually be implemented, but soaring gas prices have politicians scrambling to figure out something—anything—they can do to actually curry favor from voters now in a midterm election year. 

But Burman hasn’t changed his mind since 2008. “It is not a good idea,” he told Motherboard in an interview. 

“A gas tax holiday will have little or no effect on price in the short run," he said. "It would raise petroleum companies’ profits at a time when they are already making huge profits and would cost the Treasury a lot of money when deficits are already large.”

Burman is hardly alone in his conclusion. Motherboard asked 11 economists and tax policy experts if the gas tax holiday is a good idea and what policies they’d like to see implemented to address the problem of high prices. Six responded by publication time. 

Four either said in so many words that it is a bad idea or “not a good idea." One strongly implied it is a bad idea but said that they understood the political motivation. And the lone holdout, professor Paasha Mahdavi at the University of California, Santa Barbara, said it is a good idea “in the short term” but also likened it to giving a cancer patient pain medication because it “does nothing to address the real problem.”

But what all six experts agreed on was the gas tax holiday is a political ploy because it gives the appearance politicians are doing something about a situation that’s very difficult for them to influence in the short term. A gas tax holiday, professor Erich Muehlegger of University of California, Davis and others noted, is one of the few levers politicians have to pull to potentially change the prices at the pump right now. 

Advertisement

“The challenge here is that there really aren't many other tools that the federal government has at its disposal to lower gasoline prices in the short term,” said Muehlegger. “Gasoline prices are driven heavily by oil prices and oil prices are set based on world supply and demand.” 

The problem is that even if oil companies passed the savings entirely onto customers—a major caveat considering they could just keep prices the same and pocket the difference, as Burman noted—it is not very much. The federal government has not increased the gas tax since 1993 and it is not automatically pegged to inflation. Therefore, it is still the same 18 cents a gallon it has been for the last 29 years. According to AAA, gas prices have increased nationally by an average of 85 cents a gallon over the last month. If the gas tax holiday was enacted, it would save Ford F-150 owners—starting price: $30,000, or $422 a month—a whopping $4.68 per complete fill-up.

Another issue raised by the experts we spoke to is by suspending the collection of gas taxes, the federal government is not collecting that money and putting it into the Highway Trust Fund, which pays for new roads and maintenance. That used to be a bigger problem than it is now, according to Jeff Davis, a senior fellow at the Eno Center for Transportation. He said a gas tax holiday is “a bad idea, but it’s not as bad an idea as it used to be” because the Highway Trust Fund is no longer self-sufficient. 

Advertisement

“Since the Trust Fund ran out of money in 2008, instead of raising taxes or cutting spending, Congress has chosen the path of least resistance and transferred $272 billion from general revenues to the Trust Fund to keep the Trust Fund solvent,” Davis said. “So there is now  firm precedent for how to deal [with] Trust Fund revenue shortfalls.”

According to Davis’s calculations, if Congress suspended the gas tax through the end of the year, it would cost about $20 billion, which Congress would presumably make up with money from general tax revenue if it followed precedent. “Suspending the gas tax in this way would prove, once and for all, that the Trust Fund is a dishonest accounting mechanism that should be abolished,” Davis said.

But the biggest criticism of the gas tax holiday from the experts Motherboard spoke to was that it would give money to people who don’t need it. There is an implicit assumption among politicians that when gas prices increase, it hurts everyone. But, loathe as many people would be to admit it, many Americans can afford higher gas prices. Almost every politician advocating for a gas tax holiday will talk of people making a choice between buying gas or putting food on the table, but many Americans simply don’t have to make that choice. They can afford both. Yet a gas tax holiday does nothing to target those people who do genuinely have to make that choice. 

“Gas taxes hit lower income non-urban residents the hardest,” said professor Howard Chernick at Hunter College, but “gas tax holidays would provide a break to all drivers.” He advocates a better targeted policy to support low-income families such as through state earned income tax credits or stronger property tax relief for renters and low-income earners. Burman advocated for similar measures because “It would be much better to get money to people who are struggling to pay fuel bills.” 

And a gas tax holiday also won’t help this country avoid being in this position again in the future when gas prices rise again. In fact, it does the opposite, by solidifying the impression that the country is committed to helping motorists live a petrol-fueled life and people who rely on other modes of transportation are on their own. Few if any politicians have openly advocated for encouraging, much less committing public money to, bolstering mass transit usage or rapidly deploying bike infrastructure, for example. 

According to Sun Won Sohn, professor at Loyola Marymount University, politicians ought to be focusing on creating those appealing alternatives or other forms of long-term planning to make the country less reliant on the constant availability of cheap gasoline, as Obama called for in 2008. “No one likes to pay higher prices for gasoline,” he told Motherboard in an interview. “But we Americans waste too much energy, including gasoline. This should be a wake-up call and higher prices should encourage energy conservation.”