Why cutting the federal gas tax may not help drivers much

President Joe Biden has called on Congress to suspend the federal gasoline taxAs millions of Americans feel the financial pinch from sour gas prices.

However, stopping the 18.4 cents tax on regular gas (and 24 cents on diesel) may not do much to lower pump prices, say energy experts, who also warn that stimulating consumer demand for gas, because domestic supplies remain limited and inflation may increase actually increasing fuel costs over the longer term.

The gas tax, which has not increased in nearly 30 years, today accounts for only 4.4% of pump prices, according to the nonpartisan Congressional Research Service. This makes the tax a much smaller impact on the cost of gas than other factors, particularly the price of crude oil, cost of refining, marketing and retailers’ markups.

“People will not notice 18 cents in the ups and downs of national gas prices – it just will not be enough for them to identify it,” said Severin Borenstein, director of the Energy Institute at the Haas School of Business at the Haas School of Business. University of California, Berkeley. The price cut “would take a few weeks to continue, and by the time it did, oil prices would have gone up and down.”

A 18 cents drop in the retail price of gas translates to a shift in the price of oil of about $ 7 per barrel, Borenstein said. “It’s not uncommon for oil prices to move $ 7 a barrel in one day today.”

The average national price for a gallon of regular unleaded gas on Wednesday was $ 4.95, 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 probably have skepticism in Congress


Savings: $ 13 per month

The Congressional Research Service estimates that if there had been no federal gas tax by 2020, a typical American family would have saved $ 163 a year – or $ 13.58 a month.

That average is based on federal highway statistics, which show that the average family has just under two cars and the typical car 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 fewer fuel kilometers, and rural and suburban residents.

In the course of the entire three-month tax exemption that Mr. Biden suggests that translates into a $ 40 savings per family.

More broadly, a gas tax holiday would also not do much to curb the worst inflation the US has had in 40 years. Reducing retail gas prices by a full 18.4 cents would reduce the Consumer Price Index – a government inflation measure that tracks the cost of goods and services – by 0.18 percentage points, according to Goldman Sachs. The CPI in May changed at + 8.6% compared to the previous trading day,

Meanwhile, these figures assume that the full tax cut would be passed on to consumers. But it is fuel retailers – not consumers – who have to pay the federal gas tax. And in the past, when states cut gas taxes, retailers kept some of the savings to themselves.

Recent research from the University of Pennsylvania found that when Connecticut, Georgia and Maryland stopped their state gas taxes earlier this year, motorists received between 58% and 87% of the savings. However, those “price reductions were often not sustained throughout the holiday,” the study concluded.

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. Four states have executed gas tax holidays to keep prices low this year.

Several states are temporarily stopping gas taxes as prices rise


Oil price swings can be no saving

Another factor that could offset any savings for drivers due to a temporary cut in federal gas taxes is the price of oil. Oil prices, which have been volatile this year, are moving based on traders’ assessments of driving demand far into the future. And by reducing the cost of gas, a tax vacation 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 US is a big consumer of oil, and to that extent [a gas tax holiday] increases the demand for gasoline, that would increase the price of oil a bit, “he said.

Rising 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 driving more fuel-efficient cars – is the best way to reduce fuel prices in the long run.

Climate advocates also point out that burning gas is harmful to the environment, arguing that cutting prices and stimulating consumption is bad for the planet.

Said Borenstein: “Oil is really bad, refining capacity is really bad and gasoline produces a lot of pollution that people do not pay for.”

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