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Why cutting the federal gas tax might not help drivers much

Biden urges Congress to suspend gas tax for 3 months
Biden urges Congress to suspend gas tax for 3 months 03:15

President Joe Biden has called on Congress to suspend the federal gasoline tax, as millions of Americans feel the financial pinch from soaring gas prices.

Yet suspending the 18.4 cent levy on regular gas (and 24 cents for diesel) might not do much to lower prices at the pump, say energy experts, who also caution that boosting consumer demand for gas as domestic supplies remain constrained and inflation is surging could actually increase fuel costs over the longer term.

The gas tax, which hasn't been increased in nearly 30 years, today makes up just 4.4% of prices at the pump, according to the nonpartisan Congressional Research Service. That makes the tax a much smaller influence on the cost gas than other factors, notably the price of crude oil, cost of refining, marketing and retailers' markups.

Proposed federal gas tax holiday may not save drivers much at the pump 03:49

"People are not going to notice 18 cents in the ups and downs of national gas prices — it just won't be enough that they can identify it," said Severin Borenstein, director of the Energy Institute at the Haas School of Business at the University of California, Berkeley. The price cut "would take a few weeks to pass through, and by the time it did oil prices would have gone up and down."

An 18-cent change in the retail price of gas corresponds to a shift in the price of oil of about $7 a barrel, Borenstein said. "It's not unusual for oil prices today to move by $7 a barrel in one day."

The average national price for a gallon of regular unleaded gas on Thursday was $4.94, according to AAA. While that is down from a record high of $5.02 on June 14, it remains well above the $3.07 average a year ago. 

President Biden's gas tax holiday would likely face skepticism in Congress 03:36

Savings: $13 a month

The Congressional Research Service has estimated that, if no federal gas tax had been in place in 2020, a typical U.S. family would have saved $163 over the year — or $13.58 per month.

That average is based on federal highway statistics, which show the average family owns just under two vehicles and the typical vehicle travels about 10,000 to 12,000 miles a year. Those who drive the most would save more, including drivers of larger cars, which have worse fuel mileage, and rural and suburban residents.

Over the course of the entire three-month tax waiver that Mr. Biden is proposing, that translates into a savings of $40 per family.

Results from an analysis by the University of Pennsylvania's Wharton School were even more pessimistic. According to the findings, a 10-month gas tax suspension would save a grand total of $16 to $47 per person for the entire period.

More broadly, a gas tax holiday also would do little to curb the most ferocious inflation the U.S. has faced in 40 years. Lowering retail gas prices by the full 18.4 cents would reduce the Consumer Price Index — a government inflation gauge that tracks the cost of a basket of goods and services — 0.18 percentage points, according to Goldman Sachs. The CPI in May jumped 8.6% from a year ago.

Meanwhile, these figures assume the full tax cut would get passed on to consumers. But it is fuel refiners and importers — not consumers — that have to pay the federal gas tax. And in the past, when states have cut gas taxes, producers have kept some of the savings for themselves.

Other recent research from Wharton found that when Connecticut, Georgia and Maryland suspended their state gas taxes earlier this year, motorists got between 58% and 87% of the savings. However, those "price reductions were often not sustained during the entire holiday," the research concluded.

While Mr. Biden on Wednesday called for fuel companies to pass on "every penny of this 18 cents reduction to the consumers," as a practical matter, the federal government has no mechanism to make sure that's happening.

"There's no easy way to enforce it," Zheli He, an economist at the University of Pennsylvania, told CBS MoneyWatch. "The prices are set at the gas-station level. So if you go two blocks, the prices might be different."

Four states have implemented gas tax holidays to keep down prices this year, and other states have introduced legislation to do so. State fuel taxes are typically much larger than the federal tax, adding between 9 cents and 65 cents a gallon to the cost of gas. 

Several states temporarily suspend gas taxes as prices spike 05:11

Oil price swings could nix savings

Another factor that could undercut any savings for drivers from a temporary cut in the federal gas tax is the price of oil. Oil prices, which have been volatile this year, move based on traders' assessments of driving demand far into the future. And by reducing the cost of gas, a tax holiday would increase demand for gas. 

Oil prices would likely respond to the announcement by moving higher, said Borenstein, of the University of California-Berkeley.

"The U.S. is a big consumer of oil, and to the extent that [a gas tax holiday] increases demand for gasoline, that would drive up the price of oil quite a bit," he said.

Surging energy costs are a major driver of inflation, as they feed into the price of everything from food to consumer goods. Economists have said that using less energy — by driving less and moving away from the internal combustion engine — is the best way to cut fuel prices long-term.

Climate advocates also point out that burning gas is environmentally damaging, arguing that cutting its price and boosting consumption is bad for the planet.  

Said Borenstein: "Oil is really scarce, refining capacity is really scarce and gasoline produces a lot of pollution that people don't pay for."

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