A Gas-Tax Holiday Won’t Help Drivers — It Will Only Prolong the Supply Crunch

A s the country grapples with the recent spike in fuel costs, members of both parties are calling for a temporary suspension of the federal gas tax (the 18.4 cents per gallon that Americans pay at the pump, or 24.4 cents on diesel). The idea isn’t new. In 2008, then–presidential candidates Hillary Clinton and John McCain proposed a suspension of the gas tax between Memorial Day and Labor Day. Then, as now, the gas tax holiday proposals were more about political theater than improving the lives of drivers.

The historical record on gas-tax holidays is clear: They tend to create shortages, generate windfalls for some fuel sellers, and expand federal deficits that will drive inflation and interest rates even higher. In the end, there’s always a real price paid by American families for paper economic solutions.

While legislators should always be working to reduce the burden of government on Americans, and the federal gas tax is long overdue for critical reforms, the devil is in the legislative details. Instead of getting distracted by gimmicks, half measures, and populist shams, Congress should stay focused on the root causes of energy prices and advance permanent solutions for the American people.

With the global oil supply tightening after the Strait of Hormuz disruption, rising prices are a result of real scarcity. Price increases serve a critical function in the economy: helping avoid and mitigate shortages. When global shocks occur, price changes steer resources where they’re most needed so the economy can get back on track. A short-term suspension of the federal gas tax avoids addressing and could even exacerbate the underlying supply crunch. Meanwhile, Washington would continue spending the cash anyway, adding it to the national debt and raising interest rates on consumers and businesses while inaccurately claiming to have delivered “relief” to the American people.

The current price spike stems from a supply constraint: the blockage of the Strait of Hormuz, through which 20 percent of the world’s oil flows. Normally, producers respond to higher prices by pumping more. But now, much of that capacity is trapped in the Persian Gulf. Alternative pipelines are at maximum capacity. U.S. production is ramping up, but total output takes time to adjust.

Companies would foresee the suspension of the gas tax as a fleeting change, so their prices would barely budge as they anticipate the supply crunch staying the same or worsening down the road. Bottom line: Consumers would see little to no relief at the pump, but companies would get a small deficit-financed boost in cash.

For some, the solution is for the government to seize or redistribute the “windfall” profits that companies would receive from the tax holiday. That would create an identical burden to simply leaving the tax in place and would only make matters worse. Determining the portion of any given wholesaler’s or retailer’s price that constitutes a windfall is nearly impossible. More fundamentally, it would set a dangerous precedent. Energy companies endure boom-and-bust cycles. The prospect of profitable years compensating for losses in lean years is precisely what incentivizes private investors to provide capital for exploration, extraction, and refining. Seize profits when it’s politically convenient, and you’ll scare off investments, guaranteeing less future supply.

Instead of papering over issues with a temporary gas-tax holiday, lawmakers should permanently reduce the many layers of taxes, fees, and regulations that federal and state governments impose on oil companies in the United States. Contrary to left-wing talking points, companies in the oil and gas industry are heavily taxed, especially the upstream producers focused on oil exploration and drilling. They often pay as much in special taxes such as severance taxes as they do in corporate income taxes. While a corporate-income-tax reduction could expand supply generally, lawmakers could ease the particular burdens on upstream producers through some combination of lower state severance taxes on oil extraction, reduced royalties or lease payments for drilling rights on federal lands, lower federal excise taxes on oil producers, streamlined permitting, and full and immediate expensing of intangible drilling costs.

There are legitimate grievances against the federal gas tax, and there’s an argument for getting rid of it entirely and shifting highway financing and taxing entirely to the states, as was the case for most of our nation’s history. Too much of the revenue from the gas tax is diverted from highways to environmental reviews, mass transit, bike trails, or green energy projects. Prevailing wage mandates inflate construction costs. And, of course, electric vehicles and hybrids get a free (or relatively free) ride, despite causing more wear and tear on the roads because they are heavier than comparable gasoline-powered vehicles.

These are real problems worth solving. Simply shifting highway costs to the national credit card isn’t a solution.

Tax holidays are bad policy.

Our tax system should have as little day-to-day political interference as possible. Politicians shouldn’t be switching taxes on and off for electoral reasons. Temporary price increases help avoid rampant shortages and ensure that producers are incentivized to invest in expansions of their own production output.

A short-term gas-tax holiday is ultimately unhelpful because suppliers won’t make long-term changes in response to a temporary tax tweak. Moreover, an overly interventionist government can become a wild card that prevents markets from correcting, and that can lead to the situation going further off the rails.

The American public deserves better than policies that will exacerbate the problem and serve only as political messaging.

Joel Griffith is a senior fellow at the Plymouth Institute for Free Enterprise at the Advancing American Freedom Foundation. Preston Brashers is a research fellow at the Plymouth Institute for Free Enterprise.