Suspending the gas tax is a bad idea

Hitting pause on the federal gas tax will do little to help and is more likely to hurt the outlook for consumers.

Federal government officials made headlines this week when they suggested suspending the national gas tax. Simply put, this is a bad idea.

Pain at the pump is real these days, with gas station displays showing some of the highest numbers in history. While hitting the pause button on the gas tax might sound like it could ease that pain, it’s unlikely to help.

Since 1993 the federal tax on gasoline has been set at 18 cents per gallon. It’s a relatively small cost in proportion to the total price consumers face at the pump but an important source of government funding for highway maintenance and construction. Putting a hold on collecting this tax is far from a simple solution to our current inflation problem.

To start, it’s doubtful consumers would see any measurable drop in what they pay at the pump from this policy. Right now, demand for gas is historically strong in spite of high prices. Knowing this, oil companies might fill the void by increasing prices to boost profits. Like other businesses, oil companies seek to maximize profits. If people will pay a high price, then suppliers will charge it.

But let’s say that oil companies do allow at least some of the savings from a tax break to get passed on to consumers. The new discount on gas would allow people to buy more of it, particularly during a time of year when demand is strong. This would lead the market to drive prices back up, nullifying the effects of suspending the tax in the first place.

Finally let’s imagine a world in which suspending the gas tax leads prices to fall without driving up demand. People pay less at the pump this summer, which sounds like real relief. But rising gas prices are only one piece of the inflation puzzle. Savings from gas are likely to be spent elsewhere in the economy, leading to more inflationary pressure on other goods.

All of the above scenarios above entail the government abandoning the collection of around $10 billion in funding that would be spent on highway construction and maintenance. So the benefits of suspending the gas tax, real or imagined, come with a real and significant cost.

Cutting the gas tax is the wrong way to deal with inflation. The reasons for higher gas prices are clear—for an explanation, see this economo newsletter from a few weeks ago. The proposed policy does nothing to address the actual problem of higher demand amidst constrained supply.

If relief for our pain at the pump is in our future, it won’t be in the form of a federal gas tax holiday.

Stay tuned, more to come.