Q&A of the Day – Is Cutting the Federal Gas Tax Really Relief?
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Today’s entry: Talkback & @brianmuddradio If Biden suspends the gas tax will we just end up paying with other taxes? Where does that money go?
Bottom Line: So, it’s official. President Biden is calling on Congress to suspend the federal gas tax for three months. If enacted by Congress, there would be immediate savings at the pump. But to the point of today’s question(s), what are the other implications? The federal gas tax works in two tiers and across three types of taxes. It’s a fixed 18.3 cents per gallon for unleaded gas and a 24.4 cent hit on the purchase of diesel. There’s also a third, much smaller tax for the storage of both fuels at a cost of 0.1 cent per gallon. While it remains to be seen what Congress will decide to do, if anything, Biden is calling for all three of these taxes to be suspended over the course of three months. And while there’s no doubt most Americans would likely feel best about paying 18 cents less per gallon – you probably noticed the bigger tax and thus the biggest impact in our society would come with the impact on diesel.
There’s a good chance you don’t drive a diesel-powered vehicle. Few in this country do. The reason the federal government imposes a gas tax on diesel which is 33% higher than unleaded gasoline is due to fuel efficiency. Diesel engines are an average of 30% more efficient than their unleaded powered counterparts. The feds made sure they would rake in taxes equitably based on distance driven. But of course, who most commonly drivers diesel vehicles? Commercial drivers. And it's here that the biggest impact of all will be felt should this go through. While paying 18 cents less per gallon is nice – what would be much nicer and more beneficial – would be lower inflation and thus lower prices on everything else we’re buying. By eliminating the federal gas tax on diesel, the biggest impact in our lives would come in the form of lower wholesale inflation. Now as for the impact and whether we really are saving money in the end?
Gas taxes collected are directly allocated to the Highway Trust Fund. It’s the money specifically used for the purpose of maintaining our highways. So, is there a free lunch here – meaning is there actually the potential for simply saving this money? The answer is no. The estimated lost revenue is $10 billion to the Trust Fund and the money is needed to fund ongoing projects across the country. The net result is that if Congress votes to suspend the gas taxes as per President Biden’s request, they’ll also have to redirect funds, or allocate new spending, to offset the lost revenue from the gas tax. Given that we’re running huge federal deficits, this effectively saves us money today that we’ll be paying back with interest in the future. That stands in contrast to Florida’s gas tax holiday which will occur in October. In Florida we have a balanced budget and sufficient revenues to support all state government spending – including the impact of the gas tax holiday in October. That means Florida’s holiday is true net savings to Floridians during the month. What they both have in common is political expediency.
The timing of Florida’s gas tax holiday looks a lot like political expediency – though there is strategic budgeting sense behind it as well. Having a gas tax holiday in the month leading up to the midterm elections is what it is. But while political expediency likely plays a role, just like three months from the federal government leading up to Election Day does as well, October happens to be one of the least trafficked months of the year in Florida. So, it’s strategic from a lost revenue perspective as well. Speaking of strategy, aside from political expediency, there’s logic in having the gas tax holidays sooner than later.
We’re currently struggling with 41-year high inflation with the biggest driver of that inflation being energy prices which are approximately 50% higher than a year ago. While it remains to be seen if we’re already in a recession or just on the brink of one, there’s no doubt that the longer inflation outpaces household incomes, the greater the risk of a recession there is, and the deeper the recession would be. Quick action which directly impacts the biggest inflation driver has the best chance of minimizing the damage to the US economy. There’s no doubt a deeper and more protected recession would cost the federal government far more revenue than the $10 billion in debt spending to make up for the short-term loss of revenue. That makes the gas tax suspension good economic policy regardless of political considerations. Now, of course the best policy would be for President Biden to rescind his executive actions limiting US energy production and distribution – which created this crisis to begin with – but in the absence of good sense. The federal suspension of the gas tax makes sense.