Biden floats gas tax holiday, but analysis shows it could worsen inflation

FAN Editor

Under mounting pressure to ease rising consumer prices, President Biden is exploring a temporary suspension of the federal gas tax – but the move may only exacerbate record-high inflation.

“I hope I have a decision based on the data I’m looking for by the end of the week,” the president told reporters in Delaware on Monday.  

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The gas tax holiday – which would require action by Congress – would temporarily eliminate the federal gas tax of 18.4 cents per gallon. It is intended to help consumers cope with higher prices at the pump amid a record surge in the cost of fuel. 

A gallon of gas, on average, cost $4.96 nationwide on Tuesday, according to AAA. While that’s down just slightly from the previous high of $5.01, it’s a stunning 61% jump from just one year ago, when the average price was just $3.07 per gallon. Gas prices are expected to climb higher as the country enters peak travel season and as the Russian war in Ukraine threatens to further rattle the market.

A California gas station is seen in May

A gas tank driver delivers 8,500 gallons of gasoline at an ARCO gas station in Riverside, Calif., Saturday, May 28, 2022. (AP Photo/Damian Dovarganes) (AP Photo/Damian Dovarganes / AP Newsroom)

But the Committee for a Responsible Federal Budget, a non-partisan group that advocates for reducing the federal budget, previously argued that suspending the tax for a 10-month period could actually increase demand for gasoline and other goods and services when the economy is already confronting high consumer demand and pandemic-induced supply chain disruptions. 

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While the gas tax holiday may reduce prices at the pump, it will further increase demand for gasoline and other goods and services at a time when the economy has little capacity to absorb it,” the blog post said. “The result could be even higher rates of inflation in 2023.” 

Suspending the gas tax for 10 months would also reduce revenue by about $20 billion, according to the CRFB. 

President Biden talks about gas prices before leaving Los Angeles

President Biden speaks with reporters before boarding Air Force One at Los Angeles International Airport after attending the Summit of the Americas, Saturday, June 11, 2022, in Los Angeles.  (AP Photo/Evan Vucci / AP Newsroom)

Money from the tax is used to pay for the Highway Trust Fund, which covers expenses like highway construction and public transit. More than $42 billion is expected to flow into the Highway Trust Fund this year – more than three-fifths of which stems from the gas tax, according to the CRFB. A tax holiday would “significantly decrease” that revenue.

For months, the prices of all kinds of energy – gasoline, diesel fuel, natural gas, oil and more – have been a major driver behind inflation, which surged 7% in December, the highest level since 1982. Energy costs have climbed more than 29% over the past year, in part due to lopsided supply and demand. Consumers are traveling more, but the supply side has not kept up with the demand. 

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The rising prices are eating away at the strong wage gains Americans saw last year and are hitting the lowest-income households the hardest. An analysis from the University of Pennsylvania’s Penn Wharton Budget Model shows that higher energy prices cost the average American an additional $1,200 last year. The lowest-income households spent about 11% of total expenditures on energy in 2021, up from 8% in 2020.

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