President Trump and members of Congress from both political parties have proposed suspending the federal gas tax, currently 18.4 cents per gallon, to provide consumers relief from this year’s substantial increase in gas prices. Unfortunately, consumers are unlikely to see much, if any, benefit from this “gas tax holiday.” Instead, oil companies are the most likely beneficiaries.
The rationale is straightforward: a federal gas tax holiday treats a supply problem as a tax problem. Gas prices have spiked to nearly $5.00 per gallon due to the war with Iran disrupting oil production. Eliminating the gas tax does not solve this underlying issue. If gas prices initially fall by 18.4 cents and consumers respond by purchasing more gasoline, oil companies will be unable to meet the increased demand because supply remains constrained. As a result, prices would likely rise back toward their previous levels.
A federal gas tax holiday is an idea that sounds appealing on paper but does not withstand scrutiny.
The federal gas tax is collected by oil companies at the pump and then remitted to the federal government. If gas prices return to nearly where they were before the tax holiday, but oil companies no longer have to remit the tax, the result is an increase in oil company profit margins of nearly 18.4 cents per gallon.
Another problem is that the federal gas tax was last set in 1993 and has never been indexed to inflation. In 1993, 18.4 cents had the same purchasing power as approximately 43 cents today. The federal diesel tax, currently 24.4 cents per gallon, was also set in 1993 and not indexed to inflation. At that time, 24.4 cents had the same purchasing power as roughly 57 cents today.
As inflation has steadily eroded the value of these taxes, the Highway Trust Fund has fallen into a permanent annual deficit. Congress has covered the shortfall through borrowing, increasing the national debt in the process. Since 2008, Congress has borrowed approximately $100 billion to make up the difference. A gas tax holiday could add another $2 billion per month to the deficit if Congress borrows to replace the lost revenue.
The federal gas tax functions as a user fee for the roads. The more someone drives and benefits from the road system, the more gas tax they pay. Federal gas tax revenues are used to repair and reconstruct federal-aid highways. In Michigan, these roads are designated with an I, U.S., or M. Michigan receives more than $1.5 billion annually in federal transportation funding, and anything that disrupts this revenue risks further deterioration of these vital transportation arteries.
A federal gas tax holiday is an idea that sounds appealing on paper but does not withstand scrutiny. Though intended to help consumers, it would instead benefit oil companies at the expense of either increased national debt or reduced funding for road projects. The only lasting way to bring relief at the pump is to end the war with Iran.
Dr. Christopher Douglas came to the University of Michigan-Flint in 2006. He earned a B.S. in Electrical Engineering and a B.S. in Economics from Michigan Technological University in 2001, and his Ph.D. in Economics from Michigan State University in 2007. As Professor of Economics, he teaches Principles of Microeconomics, Principles of Macroeconomics, International Economics, Public Finance and Sports Economics.
