Yahoo Finance Biden’s proposed federal tax cut on gas could cost dearly in the future
America’s hard-pressed drivers may be about to receive a holiday. On Wednesday Joe Biden called on Congress to suspend the federal tax on gas and diesel until September as the country struggles with soaraway costs at the pump. But experts warned the tax holiday is unlikely to have a major impact on prices and will probably further harm the US’s already battered roads and bridges. If the tax cut even gets passed.
Related: Biden’s ‘cursed presidency’: gas prices are latest headache as midterms loom
Blaming Russia’s invasion of Ukraine for the surge in gas prices Biden proposed cutting the 18-cents-a-gallon federal taxes on fuel until September and called on states to cut their gas taxes too. “Together, these actions could help drop the price at the pump by up to $1 a gallon or more. It doesn’t reduce all the pain, but it will be a big help,” said Biden.
The tax cut’s first obstacle may be its last. The Senate Republican leader, Mitch McConnell, called the plan an “ineffective stunt” and other critics in his own party may join Republicans in blocking any cut.
But with prices still soaring and midterm elections looming the administration is increasingly looking for ways to spare the public from prices at the pump, currently averaging at just under $5 a gallon.
The non-partisan Tax Foundation called the plan a “uniquely ill-suited policy for addressing rising prices”. Pointing out that the money from the tax is the primary funding source for highway construction and its suspension could cost $10bn in funding.
“Anything that could help the price at the pump is good, but it’ll come at a significant cost to the federal government that supposedly uses that money for the highway fund to maintain highways,” said Mark Finley, fellow in energy and global oil at the center for energy studies at Rice University.
We don’t see lines at the pump, there is no shortage of oil, all we see is a higher price and that’s in essence because Opec wants a higher price
Ed Hirs
US energy economists also warn that dropping taxes on gasoline – a similar program has been suggested in the UK and other countries – does not address the fundamental issues of high demand.
In a February report, the committee for a responsible federal budget found a federal gas tax holiday could “further increase demand for gasoline and other goods and services at a time when the economy has little capacity to absorb it”.
“Gas prices are high because supply and demand are tight in the US and around the world both for oil and refined products. The prices are a signal that producers should produce more and consumers should consume less. You don’t fix the problem and you may exacerbate it, if you try to hide those signals,” said Finley.
Moreover, prices may surge when the tax is lifted, according to a study released from the Wharton School at the University of Pennsylvania. Earlier this year, Maryland introduced a month-long gas tax holiday. The study found that prices rose when it expired and the tax may have cost the state $100m.
Other states have tried similar measures. New York suspended its 16-cents-a-gallon tax this month for the rest of the year. Others, including Georgia, Florida and Connecticut, are cutting the tax but for shorter periods. California may send $400 to every registered vehicle owner.
The debate over energy prices threatens to become one of the most contentious of the election season. This week, Exxon Mobil said global oil markets may remain tight for another three to five years, largely because of a lack of investment since the pandemic began. Biden has responded to rising prices at the pump – and a decline in his approval rating – by lobbying Opec+ countries, which include Russia, to accelerate production increases.
Gas prices … are a signal that producers should produce more and consumers should consume less
Mark Finley
Biden will travel to Saudi Arabia next month to ask the kingdom to turn on the spigots. But studies indicate that the Saudis are themselves at the limits of current capacity. The venture comes with a political cost, undercutting the administration’s commitment to renewable energy and an election pledge to make Saudi Arabia a “pariah” state after the murder of the Washington Post journalist Jamal Khashoggi.
Other measures that the administration has undertaken to reduce energy costs, including releasing millions of barrels of crude oil from the strategic petroleum reserve and greater ethanol blending, have not turned the tide on rising prices.
According to Ed Hirs at the University of Houston’s department of economics, Biden’s actions, including a stern letter to refiners to produce more gasoline and diesel, will not keep the average price at the pump from reaching $6 by September.
The debate over energy has in a sense been misframed, said Hirs. “We don’t see lines at the pump, there is no shortage of oil, all we see is a higher price and that’s in essence because Opec wants a higher price,” Hirs says.
The message to the US consumer is equally blunt. After 2008, when oil hit $147 a barrel, US automakers had to accept government bailouts as the consumers jumped away from gas-guzzling SUVs and pick-up trucks.
“If the war in Ukraine continues we could easily see the same thing by this time next year,” Hirs predicted. “We have to think of this in a different way. A lot of folks in the west think we’re entitled to gasoline and diesel, in the same way we’re entitled to iPhones. But we haven’t operated the economy like that.”
Put plainly, there’s little the administration can do. “We’ve reached a point where supplies of gasoline, diesel and crude oil are below our five-year averages, so it appears we’ve been exporting as much as we can,” said Hirs. “As long as the conflict, really between the US and Russia, persists, the EU nations will be additional buyers. So the fellow in London looking to fill his car, and the woman in France, are competing with someone on I-95.”
