Americans are mad about high gas prices, and politicians want to show they care. But the fix that Senate Democrats and some red and blue states are considering — a gas tax holiday — is not the answer.
Despite these scary numbers, today’s gas prices look relatively moderate when you consider some additional context. Adjusted for inflation, for example, gas in mid-2008 would work out to be well above $5 per gallon in today’s dollars. Since then, incomes have also risen, and cars have become more fuel-efficient, so a gallon of gas gets you farther today than it did in years past. In other words, gas prices are not terribly high, in historical terms.
Also, that eye-popping 40 percent annual price growth owes partly to the unusually low prices in January 2021, when most everyone was still hunkering down from the pandemic and not driving very much.
But consumers are sensitive to the sticker price they see at the pump. And it’s understandable why people might care more about gas prices than those of other goods: In the short term, they can’t alter their behavior all that much to avoid the pain of higher fuel costs. If, say, beef prices go up, you can switch to chicken or some other substitute. But your commute is your commute, so when gas prices rise you’re stuck paying more to fill up your tank.
Politicians know this. They get blamed for the resulting pain, so they want to swoop in with solutions. Thing is, they can’t do very much.
Retail gas prices are determined primarily by crude oil prices set by a global market, which is not controlled by the U.S. president or Congress or governors. President Biden can release oil from the Strategic Petroleum Reserve to show he’s Doing Something, such as the 50 million barrels announced in November. But that extra oil is a drop in the barrel — equivalent to less than three days’ worth of U.S. oil consumption.
But that ain’t gonna fix the fact that global energy demands are way up and energy supply chains remain severely constrained by covid — and, more recently, by the threat of conflict involving Ukraine.
Politicians keep trying anyway. The latest proposals involve cutting the gas tax. Sens. Mark Kelly (D-Ariz.) and Maggie Hassan (D-N.H.) have introduced a bill to suspend the federal gas tax until year’s end — just through the midterms, coincidentally! — with some Democratic colleagues co-sponsoring the legislation. Several states have proposed cutting their gas taxes as well or canceling planned increases.
These are bad ideas.
For one thing, the gas tax is a relatively small part of the price consumers pay. The federal gas tax is just 18.4 cents per gallon, and state gas taxes and fees average about 30 cents per gallon. Even if those taxes are zeroed out, consumers don’t necessarily capture the full value of the savings. In previous state-level gas-tax holidays in Indiana and Illinois, oil producers captured as much as 30 percent of the savings.
And oil producers’ share of the tax cut might be higher under pending proposals.
Their share would likely be larger in a nationwide tax cut than that of an individual state, due to the larger effect on oil prices, says Severin Borenstein, a professor of energy, business and economics at the University of California at Berkeley. Additionally, producers’ share of the tax cut is likely to be bigger when supply is relatively constrained (as is the case right now), because prices are more likely to respond to increases in demand.
Finally, even if consumers did capture all the benefits of a gas-tax holiday, there’s the question of whether this is the most socially responsible way to provide relief to pinched households.
Already, the price of gasoline doesn’t reflect the fuel’s full cost to society from carbon emissions and other pollution. Further subsidizing gasoline — with the biggest benefits going to people with the least fuel-efficient vehicles — isn’t helpful. In the long run, we want incentives that entice people to shift their behavior toward less greenhouse-gas-intensive technologies. Not an implicit government guarantee that gas will always stay cheap.
All this doesn’t mean there’s no scope for immediate relief. Politicians could target rebate checks to lower-income households that are less able to absorb the cost of rising prices (not just of rising prices for gas but for everything).
They could also fess up to their impotence on this issue. But somehow, particularly in an election year, that’s never an admission politicians want to make.