Gas tax holiday relief will likely be mild, short. Americans should brace for higher prices

·4 min read

It’s unlikely Americans will feel any significant or lasting relief from President Joe Biden's proposal Wednesday for a three-month federal gas tax holiday.

The average national gas price fell this week for the first time in nine weeks, slipping below the key $5 per gallon for regular unleaded, according to GasBuddy. The decline was in line with a tumble in oil prices to about $110 per barrel, from $122, on fears the global economy is slowing and may fall into recession, AAA said.

But an easing in gas prices last week doesn’t mean the coast is clear. The world still has lower-than-usual stockpiles of oil and gas and stretched refining capacity to transform oil into consumer products, and consumption remains strong. AAA predicts car travel will set a record with 42 million people hitting the road this July 4 weekend despite historically high gas prices.

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President Joe Biden on Wednesday called on Congress to suspend the federal gasoline and diesel taxes for three months.
President Joe Biden on Wednesday called on Congress to suspend the federal gasoline and diesel taxes for three months.

Strong demand could make it backfire

The gas tax holiday, which would suspend the 18.4-cent federal tax on each gallon of gas and 24.4 cents on each gallon of diesel fuel for gas producers (not consumers), would require congressional approval. Biden would need 60 votes – at least 10 from Republicans – in the evenly divided Senate to overcome any filibuster.

If passed, experts see such a move as only providing mild temporary relief, if any, for consumers. The Penn Wharton Budget Model from the University of Pennsylvania estimated that a 10-month federal gas tax holiday would lower average per-capita gas spending by $16 to $47, depending on demand.

Key words: depending on demand.

“While a gas tax holiday may provide temporary relief from record-setting prices for some consumers, it may also drive demand even higher, thereby stoking inflation,” said John Leer, chief economist at research firm Morning Consult.

Biden also is encouraging states to suspend their gas taxes, but that’s also unlikely to provide relief for consumers for more than a day or so.

On average, one-third of an increase – or decrease – in state gasoline tax rates is passed through to consumers in the retail price on the day the change takes effect, with no significant impact after that time, according to a June 2020 study by the ARTBA Transportation Investment Advocacy Center.

What the world needs now is more supply

With summer driving not looking to let up any time soon, any lasting relief for consumers at the pump will require rebuilding dwindling supplies. U.S. gasoline inventories ended March 2.6% below the previous five-year average, according to the Energy Information Administration.

“To calm inflation, the U.S. needs additional supply relative to demand, and a gas tax holiday won't do that,” Leer said.

Unfortunately, there’s no quick fix for supply issues, experts say.

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“Unless the U.S. government is able to find a refinery it can help restart or ramp up production in the next few months, the Biden administration will be left with few good options,” Natasha Kaneva, JPMorgan’s head of global commodities research, wrote in a report.

Biden plans to visit Saudi Arabia next month, though, and some expect him to try to persuade the Saudis to pump more oil, which historically lowers crude prices.

Where does that leave consumers?

In the end, consumers will likely just have to continue to stomach higher pump prices and let the laws of supply and demand take over. Cutting taxes on gasoline and diesel, offering untargeted energy subsidies, or introducing price gouging legislation only fuels demand and puts more pressure on “supply chains that are already creaking,” Kaneva said.

In the U.S., eight states accounting for close to 9% of global gasoline demand have already either introduced tax breaks on gasoline or are considering suspending state taxes on gas, but gas prices are still near record highs, she noted.

“With demand stimulated and supply constrained, fuel prices will continue rising until demand is destroyed to a level where it can meet supply,” she said.

There are two ways demand destruction can occur: directly through rationing and indirectly through high prices. Kaneva doesn’t believe politicians will ration fuel, so the only avenue left is to allow fuel prices to keep rising to automatically depress demand. She doesn’t see balance returning to the gas market until the national average costs at least $6 per gallon.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.  

This article originally appeared on USA TODAY: Gas tax holiday relief will be brief.  We should expect higher prices.

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