In April 2021, the The Federal Reserve prophesied that inflation would only be a short-term problem and would “disappear within a few months”. Yet here we are almost a year later with the highest level of inflation in four decades, and no sign that inflation will come down any time soon. Whether it’s more expensive groceries, higher monthly rents, or new and used cars at extortionate prices, it feels like everything is more expensive. Some of the biggest increases are concentrated in energy costs, and President BidenJoe BidenAustin on Possible Russian Invasion of Ukraine: ‘I Don’t Believe It’s a Bluff’ Energy and Environment Overnight – Situation in Russia Could Worsen Gas Prices On The Money – Fed Imposes Strict Limits senior management transactions MORE did not take energy inflation seriously. He has proposed raising energy taxes, ending drilling on federal lands and blocking the issuance of new drilling leases — all moves that will exacerbate the pain Americans are feeling at the pumps.
The Democratic base may applaud Biden’s hostility to the fossil fuel industry, but his policies are directly contributing to the rising prices drivers face nationwide.
Misguided as the president’s policies are, some swing-state Democrats who are up for re-election in November also have a misguided legislative proposal they hope will lower gas prices. A group of moderate senators tabled a bill suspend the federal gas tax until January 1, 2023. While their legislation is well-intentioned, it is fundamentally flawed and can only be described as a short-term band-aid to a larger problem.
Economists are mixed on whether or not gasoline tax exemptions actually lower gasoline prices. More than 300 economists, including six Nobel laureates, have noted in a letter from 2008 that “a tax holiday would provide very little relief to families who feel pressured”. Economists note that a complete suspension of the gasoline tax would not lower the price of gasoline by the full amount of the tax, because producers bear part of the tax burden. In previous state gasoline tax exemptions in Indiana and Illinois, the researchers found that consumers do not take full advantage of the gasoline tax suspension; part of their savings goes to oil producers.
A suspension of the gasoline tax could result in some reduction in prices in the short term, but the long-term impact on the federal budget could be significant. The gas tax was once one of the most efficient user fees imposed by the federal government: drivers paid at the pumps and that money was used to restore the roads those same drivers drove daily. Revenue from the federal gasoline tax, currently imposed at the rate of 18.3 cents per gallon, goes to the Highway Trust Fund (HTF) and is used to pay for most road and highway repairs. This bill could delay the completion of much-needed repairs or other critical infrastructure projects.
Without tax revenues being deposited in the FASS, this bill would ask all taxpayers to bear the burden of returning the entire fund through transfer payments from the general fund. Since the HTF is prohibited from having a negative balance, taxpayers would have to make up any shortfall, which the Center for a Responsible Federal Budget calculates to be $20 billion. The CRFB notes that “although the gas tax exemption may reduce prices at the pump, it will still increase the demand for gasoline and other goods and services at a time when the economy has little ability to absorb it. The result could be even higher inflation rates in 2023.”
Enacting a gas tax exemption would also hasten the demise of the fund, which is expected to be insolvent in five years. On both sides of the balance sheet, the HTF faces a series of challenges, which the Congressional Budget Office estimates will result in cumulative deficits of $189 billion over the next decade. Lawmakers should focus on closing this large fiscal gap instead of proposing ways to exacerbate the problem, even if it is “paid for” with one-time general revenue transfers.
Americans everywhere need relief from energy inflation. If lawmakers are serious about lowering gasoline prices, they should focus on promoting power generation of all types and solving the government’s mind-boggling spending problems. The gas tax exemption is nothing more than a short-term gimmick that would benefit the interests of incumbent politicians running for office rather than their constituents. Gas tax suspension may be good policy, but it is certainly not good public policy.
Thomas Aiello is the Director of Federal Affairs for the National Taxpayers Union, a nonprofit organization dedicated to advocating for sound tax and fiscal policy at all levels of government.