The Biden administration is struggling to keep gas prices in check as inflation and the energy crisis continue to stretch American incomes. Last week, gas prices reached a national average of $5.01 and inflation is at its highest in 40 years. The War in Ukraine, COVID recovery, and gasoline shortages are to blame and now the Biden administration has to look for new ways to ease the strain on Americans.
1. What is it?
The federal government charges a tax of 18 cents per gallon on gasoline and 24 cents per gallon on diesel. This tax amounts to over $36 billion yearly and funds the Highway Trust Fund, which supports critical infrastructure such as highways and public transportation. On June 22, President Joe Biden called on Congress to take legislative action to institute a three-month federal gas tax hiatus. In addition to a federal gas tax hiatus, President Biden is encouraging state and local legislators to follow his lead and institute state gas tax hiatuses. Biden hopes that this will reduce the strain on American families, but not all believe this to be the case. The proposed tax hiatus would have to go through congress before taking effect, but this seems unlikely to happen as few legislators have expressed support. The tax hiatus would create a $10 billion deficit for the Highway Trust Fund, however, Biden insists that the fund would not be affected and that federal funds could be reallocated from elsewhere.
2. What do economists say?
Many economists have expressed disapproval of President Biden’s proposal. Artificially lowering the price of gas will increase demand, however, there is no supply to meet that demand. In the long run, this will likely drive prices up further. The price at the pump is about more than just inflation or the war in Ukraine. Oil refineries haven’t fully recovered from the crash in gas prices at the beginning of COVID-19. As a result, many American refineries have shut down. This means that even without Putin’s war, gas prices would still rise. Refineries simply cannot produce enough to meet the current supply, which is further heightened by the summer vacation series. Jason Furman, Obama’s chief economic advisor, warned that this gas tax cut will “only push prices up, enabling refiners to increase their profit by billions.” Furman and other economists insist that demand must subside before any real change will be felt.
It’s therefore doubtful the tax cuts would even reach the consumers. According to a study by the University of Pennsylvania, in states that instated temporary tax cuts, barely over half of the price cut was reflected in the price of gas. The same study estimated that if the tax cut lasts six months, the average American would save between $16 and $47. Meanwhile, this would leave a $20 billion hole in the federal budget.
3. What does congress think?
Both Republicans and Democrats are opposed to President Biden’s gas tax hiatus. Nancy Pelosi said “the con is that the oil companies do not necessarily pass that on to the consumer, and you cannot write a law that requires them to pass it on.” Pelosi went on to call President Biden’s actions “showbiz,” because it wouldn’t actually help consumers. Other Democrats feel the same. Delaware Senator Tom Carper, chair of the Senate Environment and Public Works Committee, tweeted, “Suspending the primary way that we pay for infrastructure projects on our roads is a shortsighted an inefficient way to provide relief.” Congressman Peter DeFazio (OR-04), House Transportation Chair, said Biden’s proposal was “short-sighted” and “undermines the impact of the Bipartisan Infrastructure Law.” This is especially pertinent given the effort taken to pass the Build Back Better infrastructure bill earlier this year. Republicans have repeatedly called Biden’s gas tax hiatus a “gimmick” to secure votes for the upcoming midterm elections. Without congressional support from either party, Biden’s proposed gas tax hiatus is unlikely to go anywhere. The bill would have to pass through both the House and Senate, and with sparse support, this is unlikely.
4. Would the gas tax hiatus help win elections in November?
Rising inflation and cost of living is undermining Democrats’ hopes of maintaining their majority in the House and Senate. Some, including Congressman Tom O'Halleran (AZ-01) and Congresswoman Kim Schrier, M.D. (WA-08), advocated for the gas tax hiatus in hopes it would boost their numbers in the polls. If states implement a gas tax hiatus in addition to a federal tax hiatus, then consumers might feel some temporary relief. However, the daily fluctuations of the current volatile market make consistent downtrends in gas prices unlikely, meaning consumers may hardly notice. This is all considering that the full amount of the cut is passed down to the consumer. It therefore seems doubtful that the proposition of a gas tax hiatus will make much difference in the polls.
5. What other options are there?
President Biden has released one million barrels of oil per day from the Strategic Petroleum Reserve. The U.S., however, consumes more than 19 million barrels per day, so an additional one million will do little to increase supply. President Biden has also relaxed environmental regulations on ethanol blending. This has frustrated and dismayed many environmental protection groups and will provide little in terms of gas price. Biden has also called on domestic oil refineries to increase production and lower their profit margins. The issue, however, does not stem from lack of production per refinery but rather from a lack of refineries. Additionally, lowering their profit margins at a time when many other refineries have closed their doors is a risky move for private businesses. Many Republicans have called on Biden to resume the Keystone Pipeline that would run through the Midwest. While this idea may prove productive in the long run, it will take years to be fully productive, thus not lowering the price of gas today. Many economists have suggested limiting U.S. fuel exports since there is a large market and immediate need for the oil domestically. This may be a more productive idea than those that have been attempted, however, it still depends on type of crude oil and demand for different types that are produced domestically. There is no clear solution that will bring the price of oil down drastically, but it’s generally understood that a gas tax hiatus is only creating more problems for the future.
