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Finance and Accounting

Christina Lewellen Weighs in on President Biden’s Proposal for Three-Month Federal Gas Tax Holiday

Federal Gas Tax Holiday

In June, President Biden called on Congress and states to take legislative action in an effort to provide relief to Americans at the gas pump. 

“Specifically, he is calling on Congress to suspend the federal gas tax for three months, through September, without taking any money away from the Highway Trust Fund,” according to a recent White House press release.

Christina Lewellen, assistant professor of accounting, weighs on this proposal in the following Q&A: 

Do you think this would provide any relief at all? 

While the proposal to temporarily suspend the federal gas tax seems appealing, in reality it would likely not provide meaningful relief on gas prices for most consumers. The federal gas tax is 18 cents per gallon, so for a standard 4-door sedan, the gas tax holiday might save a consumer about $2-$3 per tank of gas. For a larger vehicle, it might save about $5 in taxes per tank of gas. One issue noted by skeptics of this proposal is that there is no regulation on the price of gas, so there is no guarantee that oil companies will pass on these tax savings to the consumer. Gas prices are based on markets of supply and demand, and the demand for gas is fairly inelastic, meaning that people will mostly continue to drive as they do now no matter what the price of gas is. This dynamic makes it easy for oil companies to maintain a high gas price while not experiencing a reduction in sales. Thus, as long as people continue to drive despite the high gas prices, there is no incentive for the oil companies to reduce the price based on the demand and they may just pocket the savings in gas taxes. 

Do you think it is a positive step? 

While the President obviously means well in his intentions to try to save consumers money, the fact that consumers may not even realize the savings from the tax holiday suggests it may not be a positive step. In addition, while the marginal savings per consumer is fairly minimal, experts estimate that the aggregate reduction in tax revenues from the tax holiday would be about $10 billion. This tax revenue is used for public roads, bridges, and other infrastructure. So while consumers may experience a reduction in their explicit taxes, they may also bear an indirect tax burden of lower quality roads due to the tax holiday. 

Do you think Congress would block this proposal and why?

Right now it seems that Congress is unlikely to support this tax holiday proposal due to the significant cost in tax revenue along with the significant skepticism regarding the extent to which consumers will benefit from the tax holiday.