Today’s announcement that President Joe Biden will request a three-month suspension of the federal gas tax has sparked a debate. On the one hand, this potential gas tax holiday would clearly provide short-term support to consumers impacted by sky-high prices. On the other hand, however, many believe the holiday could prove ineffective and carry negative ramifications.
Looking at the bullish angle first, it’s clear consumers are getting hit hard right now. A number of factors, including pent-up consumer demand, supply-chain issues and a lack of domestic refining capacity, have made for higher prices at the pump. Anything the government can do to help the little guy certainly seems like a solid move.
For Democrats, action is better than inaction. And while 18 cents per gallon may not move the needle much, it’s something. But a growing number of pundits believe this gas tax holiday may not lower gas prices at all.
Let’s dive into why this may be the case.
Why the Proposed Gas Tax Holiday May Not Lower Gas Prices
First off, it’s important to note that gas prices are complex. They are the result of a number of factors outside the price of crude oil. While the price of crude makes up roughly 60% of the cost of gasoline, other factors like refinery costs, marketing, distribution and gas station profits also factor into the equation.
However, there are a number of reasons why many in the financial community are skeptical of the proposed tax holiday. One Wharton study shows that, in the past, the temporary removal of gas taxes at the state level led to higher prices following the reinstatement of the same tax later — higher prices than if the tax had not been removed. Meanwhile, other experts say the ultimate near-term positive impact of the tax holiday will likely be too small to matter.
Unfortunately for consumers, sometimes the solution to inflation is higher prices. If prices remain elevated for a given period of time, consumption (demand) should come down — at least in theory. That reduction should result in lower prices over time, according to supply and demand fundamentals. Thus, the suspension of this gas tax could actually result in higher near-term demand, stoking prices higher over the medium term.
On top of this, the expected cost of the gas tax holiday would be about $10 billion. These funds are used by the government to maintain highways and infrastructure. According to an analysis from the Urban Institute, the gas tax holiday “could do more harm than good in the long run” as infrastructure projects remain under-funded.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
