How Much Would a Gas Tax Holiday Actually Do?
Why are gas prices so high?
For the last month, Colorado’s average price per gallon of gas has been stuck at around $3.96 per gallon — very close to the all-time record of $4.09 in 2008. In order to ease the impact of rising prices at the pumps, Governor Polis has called for a federal gas tax suspension, and asked the Colorado General Assembly to delay the implementation of SB21-260, a $5.3 billion transportation funding bill that Gov. Polis signed into law last year that raises the fee on gas sales starting at 2 cents per gallon in July of this year.
There are a few contributing factors to this increase in price, but the primary reason is the Russian invasion of Ukraine. On March 8, President Biden announced that the U.S. was banning imports of oil from Russia in response to its invasion of Ukraine. Though Russian crude oil makes up only about 3 percent of U.S. oil imports, any reduction in supply results in higher gas prices for consumers. Combined with COVID-19 restrictions relaxing and summer approaching, there is currently much more demand than supply for fuel.
The graph below shows the average annual price of gasoline from 1976 through 2021 in the United States. The orange line shows the price consumers paid at the time, while the blue line shows the price adjusted for inflation. You can see that even though prices are nominally high, they’re still lower than they were in the early 1980s and mid-2000s and 2010s.
What do we pay in gas taxes?
The federal gas tax is 18.4 cents per gallon and has not increased since 1993. Since it is not adjusted for inflation, the real value of the federal gas tax has been declining. The gas tax is the main source of revenue for the Highway Trust Fund, which funds federal road and bridge projects. This stagnant funding stands in stark contrast with the price of construction projects according to an analysis from the Institute on Taxation and Economic Policy, which found a 185% increase during the same period. For this reason, and because vehicles have become more fuel efficient, the purchasing power of the federal gas tax has declined by 72 percent since 1993.
Coloradans also pay a state gas tax of 22 cents per gallon. Beginning in July 2022, as a result of SB21-260, motor fuels are subject to additional fees starting at 2 cents and eventually reaching 8 cents, which will be phased in between FY 2022-23 through FY 2028-29 and then indexed to the National Highway Construction Cost Index. However, lawmakers and Gov. Polis appear poised to delay the implementation of that law in an effort to help people with rising costs.
What will a gas tax holiday do?
There has never been a federal gas tax holiday, however it’s reasonable to expect that it won’t do much, if anything, to reduce fuel prices. Part of the reason is because the tax is levied on producers, not consumers. Oil companies simply pass along those costs to consumers. Because the demand for fuel and the supply of fuel aren’t affected by a tax as small as the federal rate, it’s entirely possible the price will go up enough to eat away most of the savings.
Even if the savings do reach them, 18 cents a gallon is not enough to create meaningful relief. On average, U.S. drivers travel 13,500 miles a year, according to the U.S. Department of Transportation’s Federal Highway Administration. If you drive 13,500 miles a year and your car gets 24 miles per gallon, it would amount to less than $10/month in savings. With current prices, that’s less than a quarter of a tank for most small cars.
While the savings aren’t guaranteed, a gas tax holiday carries huge costs for the public services the taxes pay for. In 2020, Americans used about 123.7 billion gallons of gasoline. Assuming a similar consumption for 2022, lifting the 18.4 cents gas tax for the rest of 2022 would cause the loss of about 17 billion dollars.
What about climate change?
The transportation sector is the largest source of pollution contributing to climate change in the U.S., accounting for a little less than one-third of emissions. A gas tax cut could result in higher fuel consumption. A study by the University of Pennsylvania shows that under such a tax cut, from March to December 2022, the average gasoline consumption per capita in Colorado would increase by 0.84 to 2.47 gallons (depending on demand elasticity).
This is especially frustrating because Colorado is already behind when it comes to meeting our climate goals according to the state’s greenhouse gas reduction roadmap. If we want to achieve those goals, we need to accelerate the transition to clean energy in the transportation sector and invest in public transportation and electric vehicle infrastructure. We need policies that move us away from burning fossil fuels, and a gas tax holiday would work in the opposite direction.
Can’t we just drill for more oil?
It’s reasonable to wonder whether increasing domestic oil production would increase supply to meet the rising demand for gas. However, domestic gas prices are driven largely by global oil prices. There are a number of other challenges that mean ramping up production might not even be possible on the scale needed to lower prices.
Additionally, increasing domestic production is not simple. Oil producers are facing a shortage of workers and equipment as a result of the pandemic. Gasoline supply is also constrained by refining capacity, not just oil production. U.S. refineries are built for lower quality crude oil that is imported from other countries, not the higher quality crude that is produced domestically. For that reason, we would likely be exporting the increased production rather than shipping it domestically.
Moreover, here in Colorado oil companies are currently sitting on thousands of permits. At least two local companies told investors on earnings calls earlier this year that, despite having the permits, their company intended to use the windfall from high oil prices to pay dividends to shareholders rather than invest in increased production.
Are there any other alternative solutions to give people relief on gas prices?
A gas tax holiday would do little to help working families, it wouldn’t do anything to increase supply or reduce demand for gas, it would significantly reduce federal revenues, and would delay the necessary transition away from fossil fuels. That is all aside from the fact that it wouldn’t target relief to the people who need it most. There are better, more targeted policies that can be implemented to help families at times of high inflation, such as tax credits like the Earned Income tax Credit (EITC) and Child Tax Credit (CTC) that help people who earn low incomes afford basic needs. Directing cash into the hands of workers and families is proven to stimulate economic activity locally, and it would be a more effective and efficient way of helping people afford high gas prices.
Instead of temporarily suspending the gas tax, Congress could alleviate some of the effects of fuel inflation by permanently making the CTC fully refundable, permanently extending the CTC to children of immigrants who pay taxes with an Individual Tax Identification Number, continue to pay the CTC out in monthly installments, expand the EITC to younger workers below the age of 25, and bolster the size of both programs.
