Drivers don’t see full benefit from state gas tax holidays
Several states are trying to give drivers a break from high gas prices by temporarily suspending their gasoline taxes. And President Joe Biden is urging Congress to do the same by lifting the federal gas tax through September.
But consumers don’t receive the full benefit of gas tax holidays, according to a recent analysis by the nonpartisan Penn Wharton Budget Model, which looked at suspensions in three states through mid-May. Instead, they have to share the savings with gas suppliers, which capture part of the economic benefit if pump prices don’t fall by the full amount of the suspended tax.
The report quantifies some of the criticism that economists and budget experts have voiced about gas tax holidays. In addition, they argue that temporarily eliminating the tax does not help curb inflation in the long run, since it spurs demand by lowering prices without enhancing supply. Plus, it reduces tax revenue and funding for transportation repairs and infrastructure.
So far, Connecticut, Florida, Georgia, Maryland and New York have temporarily suspended their gas taxes, while Illinois and Kentucky blocked scheduled gas tax rate hikes, according to the nonpartisan Tax Policy Center. Other states have expressed interest in gas tax holidays or other measures to help residents pay for fuel.
Congress is unlikely to act on Biden’s call. Though past administrations have called for gas tax holidays, lawmakers have never approved such a measure.
State gas tax holidays
In Maryland, 72% of the tax savings was passed on to consumers, according to Penn Wharton, which used two separate methods to calculate the benefit in each state it examined.
The state suspended its gas tax of 36.1 cents per gallon from March 18 to April 16. Drivers saw a drop of about 12 cents the day after the holiday took effect, but the reduction grew to a little less than 30 cents for much of the period.
Georgia eliminated its 29.1 cents per gallon tax on gas from March 18 to May 31. Consumers there received between 58% and 65% of the savings, depending on which method Penn Wharton used.
Peach State drivers saw prices decline more gradually, starting with 7 cents soon after the holiday began to about 30 cents in mid-May.
Between 71% and 87% of the savings was passed on to consumers in Connecticut, Penn Wharton found. The state eliminated its gas tax of 25 cents per gallon from April 1 to June 30. Gas prices slid 11 cents the day after the holiday began. The decline grew to 23 cents on April 15 but then shrank slowly to about 14 cents in mid-May.
“Based on our study, we don’t find the entire tax decrease was passed on to consumers,” said Zheli He, a Penn Wharton economist who’s a co-author of the report. “The rest of it was captured by distributors.”
Federal gas tax holiday
On Wednesday, Biden pushed Congress to suspend the roughly 18-cent federal gas tax, saying it would “give families just a little bit of relief.”
Experts have questioned how much gas tax holidays really help drivers.
Consumers would probably get only one-third of the benefit of a federal gas tax break, tweeted Jason Furman, an economics professor at Harvard University who was chair of the Council of Economic Advisers in the Obama administration.
“Whatever you thought of the merits of a gas tax holiday in February it is a worse idea now,” Furman tweeted. “Refineries are even more constrained now so supply is nearly fully inelastic. Most of the 18.4 cent reduction would be pocketed by industry — with maybe a few cents passed on to consumers.”
Senior administration officials have acknowledged that criticism but said Biden would pressure companies to pass along the savings to drivers.
“The President is calling and demanding that the industry, the companies and the retailers, pass that on to the consumer at the pump,” Amos Hochstein, senior adviser for energy security at the State Department, told CNN “New Day” co-anchor John Berman on Wednesday.
“We would scrutinize it and we would call on the industry to do exactly that, to pass it on,” he said.
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