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Say no to a gas tax holiday

by Maya MacGuineas, Opinion Contributor - 02/23/22 3:30 PM ET

With inflation at a 40-year high, some policymakers have called for suspending the federal gas tax through the end of the year. While this might provide a small amount of temporary relief at the pump, it’s not a solution to rising prices. It’s not even a band-aid; unlike a band-aid, it would actually make things worse.

A gas tax holiday would exacerbate inflationary pressures and slow a needed transition to more energy-efficient and climate-friendly technologies, while cutting off a key source of infrastructure funding. It’s a way for politicians to pretend they are making the situation better, when in fact they are making it worse.

For starters, a gas tax holiday would do almost nothing to address the rising cost of living. Last year, consumer price index inflation grew by a whopping 6.7 percent. Without the gas tax, inflation would still have been at least 6.5 percent — and that assumes the entirety is returned to the consumer in the form of lower prices.

In reality, the benefits of a gas tax holiday would be even smaller. As several economists have noted, oil producers and gas stations are likely to respond to the holiday by raising the pre-tax price of gasoline. Indeed, the largest beneficiaries may well be oil producers that absorb the tax break before allowing some of it to trickle down to taxpayers.

Meanwhile, consumers would spend their savings on other goods and services, pushing up prices elsewhere in the economy. Without measures to replace the revenue, this would leave less funding for highway construction and maintenance and advance the insolvency date of the Highway Trust Fund.

And once the holiday ends (if it is allowed to end), inflation would be even worse than before it started. Rather than countering the highest inflation rates seen in decades, suspending the gas tax in an overstimulated economy would boost inflation in 2023, as surging demand coincides with re-imposition of the tax. Remember, it was excessive tax cuts and spending that helped get us into this inflation mess; they aren’t going to get us out of it.

Meanwhile, a gas tax holiday would defund our infrastructure and worsen our nation’s already precarious fiscal situation. The federal gas tax currently helps fund highway and transit spending through the Highway Trust Fund. The Committee for a Responsible Federal Budget estimates that suspending the gas tax through the end of the year would reduce that revenue by roughly $20 billion, nearly halving the trust fund’s revenue for the year.

Lawmakers have promised to make up for the lost revenue by transferring funds from general revenue into the trust fund. But robbing Peter to pay Paul would still increase the size of our massive federal debt and undermine efforts to assure sustainable infrastructure financing. Our national debt is already nearly as large as the economy for only the second time in U.S. history (the first being the result of World War II), and the last thing we need is to worsen it further.

And to make matters worse, a gas tax holiday would amplify the climate crisis and slow the development and adoption of cleaner technologies. Motor vehicles are responsible for about one-sixth of all carbon emissions in the United States. Better fuel efficiency, more widespread use of electric and hybrid vehicles, and greater use of public transit and carpooling can all help to reduce these emissions. But cutting the gas tax – the only federal form of carbon pricing in effect in the United States – would slow progress.

If anything, we should be moving in the opposite direction. Replacing or supplementing the gas tax with broader carbon pricing would efficiently reduce emissions and encourage new technologies. Over the medium term, such a tax could help to temper excessive demand and drive down the price of clean energy and transportation alternatives.

To avoid driving up near-term prices, lawmakers could begin with low carbon tax and schedule it to rise in the future as inflation is better under control. Just the knowledge of future carbon prices can encourage the development and adoption of low-carbon technologies.

We should also secure federal trust funds and reduce our rising national debt. Within a dozen years, the highway, Social Security and Medicare trust funds will all be insolvent. We need thoughtful trust fund solutions – including tax and spending reforms – to secure these benefits, grow the economy and put our country on a better fiscal path.

We aren’t going to fix these problems overnight, but we should at least not make them worse. Misplaced tax cuts and excessive spending are partly responsible for the inflation currently hurting Americans. Cutting the gas tax would make that worse — boosting inflationary pressures, undermining infrastructure funding, accelerating climate change and worsening our nation’s fiscal picture.