Biden’s Gas Tax Holiday Wouldn’t Make Much Difference
President Biden says he’s still committed to reducing U.S. carbon emissions to net zero in the near future. At the moment, though, his overriding priority is to ensure an ample supply of gasoline at reasonable prices.
I’m reminded of the appeal to God by St. Augustine in his youth: “Give me chastity and continency, only not yet.”
The White House maintains there’s no inconsistency between wanting more oil now and wanting less later. “We can walk and chew gum at the same time,” a senior administration official told reporters this week, according to Axios. That may be so, but the mixed message is confusing and demotivating.
On Wednesday Biden asked states to suspend their gasoline taxes, while asking Congress to suspend the federal tax for three months. I wrote a newsletter in March arguing against suspensions of state gasoline taxes.
The only good thing I can find to say about Biden’s plan is that on the federal level it wouldn’t make much difference, at least in the short term.
Here’s why. Suspending the federal tax of 18.4 cents a gallon would reduce the average price paid at the pump by about 4 percent (assuming the entire savings were passed on to drivers). But gasoline accounted for just 4.5 cents of every $1 spent by consumers in April, according to the Bureau of Labor Statistics. So the net effect on the price index for all goods and services would be only about two-tenths of a percent in the month the plan went into effect. And the benefit would be undone when the holiday ended after 90 days.
Worse still, the actual benefit to consumers would be smaller than two-tenths of a percent because refiners and gas stations would pocket some — perhaps most — of the savings from a gas tax holiday. That’s not because of evil corporate machinations; it’s just market forces at work. Refineries have very little extra capacity, according to utilization data collected by the Energy Information Administration. So they can’t significantly raise output if a tax holiday raises demand for gasoline.
By the iron law of supply and demand, if the demand for gas exceeds supply at the tax-free price, the price must move back up to around where it was before to bring the market back into balance. That would mean bigger profits for refiners and retailers.
“We can cut the tax but it might not change the price,” said Betsey Stevenson, a University of Michigan public policy professor who served in the Obama administration as chief economist in the Labor Department and later as a member of the president’s Council of Economic Advisers.
So Biden’s plan wouldn’t help consumers much. The silver lining is that it consequently wouldn’t hurt the environment much. “The bad thing about the policy is also the good thing about it,” said Roberton Williams, an economist at the University of Maryland.
Biden’s proposal is mainly symbolic, to show he cares. It’s of a piece with jawboning oil industry executives, releasing oil from the Strategic Petroleum Reserve and his planned trip to Saudi Arabia next month to ask the Saudis to pump more oil. “Ultimately,” Stevenson said, “this isn’t an economic move as much as a political move by the president to show that he’s doing everything he can to bring down gas prices, even if it’s just a few cents.”
But that doesn’t mean the proposed holiday is harmless. The message it conveys is that the gas tax is bad for consumers — when in fact the United States and other nations should be raising taxes on fossil fuels to compensate for the air pollution and global warming they cause. The revenue from higher gas taxes could be passed along to the public through reductions in more harmful taxes, such as those on working and investing.
“Consumers need to understand that it’s risky to be dependent on gas, because its price is so volatile,” Williams wrote in a follow-up email. “If the government steps in any time that gas prices go up, it keeps people from learning that lesson.”
When Biden castigates oil executives for not producing more, as he did in a letter this month, he opens the door to their entire pro-production agenda: lifting development restrictions on federal lands and waters, speeding up permitting and the like. The American Petroleum Institute is understandably trying to get some leverage out of this episode. “Ahead of his travel to the Middle East next month, we urge the president to prioritize unlocking U.S. energy resources that are the envy of the world instead of increasing reliance on foreign sources,” Mike Sommers, the president of the institute, said in a statement responding to Biden’s letter.
Biden would be better off pivoting to policies that would not blunt the fight against climate change.
One idea is to keep the gas tax at its current level, but provide relief to groups that are harmed the most by high gas prices, such as low- to moderate-income drivers and people in rural America, who have to drive more miles per day on average. That approach preserves market incentives to balance supply and demand while still helping some of the hardest hit.
To be sure, getting the aid right is tricky. If you’re too precise, so that people get exactly what they need to offset the higher cost of gasoline, you end up insulating them from higher prices and they over-consume. If you’re not precise enough, you hand out a lot of aid to people who don’t drive at all and give not very much to people who drive a lot, which invites grumbling. There is no perfect answer.
Another good idea is to focus on reducing demand for gasoline rather than increasing the supply of it. The beauty of that approach is that it’s time-consistent: It helps in both the short and the long runs. A reader of this newsletter, Jeff Perlowitz of Park City, Utah, wrote to me, “My idea is that every state should immediately declare any and all mass transit free.” (That would be instead of declaring state gas tax holidays, as several have done.)
Drivers can save money without government intervention through common-sense measures such as combining or eliminating trips, joining car pools, taking public transportation and — this one’s simple — driving more slowly. According to the U.S. Department of Energy, fuel efficiency declines rapidly at speeds over 50 miles per hour. “Obeying the speed limit, accelerating and braking gently and gradually, and reading the road ahead can improve the fuel economy of your vehicle by 15 percent to 30 percent at highway speeds and 10 percent to 40 percent in stop-and-go traffic,” the department says. If you drive 75 or 80 miles per hour on the highway, you’re worsening the problem of high fuel prices, not to mention raising the risk of a bad accident.
I get that Biden is in a tough spot. Even without politics it would be hard to get the glide path to net zero exactly right: winding down investment in fossil fuels, but not so quickly that the nation runs out of energy. On top of that, high inflation — and in particular high gas prices — could hurt Democrats’ chances in the midterm elections this fall, which would itself lessen the chance of getting responsible climate policies. Given the political situation, Robert Stavins, an environmental economist at Harvard Kennedy School, says that it’s understandable for Biden to take a brief break from his focus on fighting climate change in order to appear to help motorists. “Sometimes kicking the can down the road is the appropriate thing to do,” he said.
Maybe. But Biden knows that climate change is a clear and present danger. He has to be careful about taking his foot off the gas.
The readers write
I am having trouble understanding Jerome Powell’s Fed and the markets. Last year when the stock market and housing market were booming, the Fed chose to keep interest rates at their zero lower bound and to pump $120 billion a month in market liquidity by buying bonds. Now that the stock market is tanking and the housing market is beginning to crumble, the Fed decides to accelerate its pace of interest rate increases and to commit to withdrawing $95 billion a month in liquidity later this fall by not rolling over its maturing bond holdings. I fear that the Fed has lost the plot and is setting us up for a hard economic landing.
The writer is a senior fellow of the American Enterprise Institute.
Quote of the day
“The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both.”
— Milton Friedman, in his “Free to Choose” television series, 1990
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