There is an energy crisis in the United States impacting families at the pump, diesel-powered supply chains, and the broader electricity grid. With gasoline and diesel prices skyrocketing in recent months – reaching all-time record highs – the Biden administration is considering temporarily suspending the federal excise tax on fuel at the pump. Suspending the gas tax would result in the price at the pump changing overnight, but there are several significant impacts to consider.
1. The price of gasoline will fall by 18.4 cents overnight
The price you see at the pump already has taxes baked in. Unlike an item at the store priced at $2.00 that you end up paying $2.16 due to taxes, at the pump, the number on the sign already has local, state, and federal taxes. The federal tax is 18.4 cents per gallon. The moment this tax is suspended, the price at every pump in America should fall by 18.4 cents, making a 10-gallon purchase $1.84 cheaper.
While this is an actual price reduction, the 18.4 cent fall, in context, would drop the national average from about $5.00 per gallon to $4.816 – a far cry from the roughly $2.30 per gallon price when President Biden took office or even the roughly $3.40 per gallon price when Russia invaded Ukraine. This action would therefore only temporarily reverse 18.4 cents of a roughly $2.70 price increase over the last 18 months. Nevertheless, it would have an immediate effect.
2. The price will not continue to fall and there are no more at-the-pump tricks
While the effect of an 18.4 cent price drop per gallon would be immediate, this price drop would not be sustained or augmented. To begin with, once the full gas tax is suspended, the federal government cannot reduce the price anymore; it is a one-time play. States and localities could act to shave off a few more pennies, but the federal government’s action at the pump cannot go beyond 18.4 cents for gasoline and 24.4 cents for diesel.
There is no promise this savings would hold either. As long as the gas tax is suspended, those pennies per gallon will be withheld from the price, but other market forces could eat away the savings and put pennies back on the sign out front. With federal limitations on oil and gas exploration and production, pipelines facing intense scrutiny or cancelation, cartel behavior by foreign oil producers, refinery capacity facing significant restraints, and the general trend of gas prices rising, there is no reason to think the gas price would stay where it is or decline further, and the price could easily return to or surpass the level it currently is sits even though the tax itself is suspended. What is more, the gas tax cannot be suspended forever, so it may be reinstated at a time of high gas prices that would be punishing to all Americans. When the gas tax is reinstated, there will be an overnight 18.4 cent per gallon increase (or higher if the gas tax is increased, but more on that in No. 5 below).
3. Demand for gasoline will increase
Whenever prices change, demand also changes. While the decline in price may be small, the marginal consumer will increase their demand and consumption of gasoline as a result of the gas tax suspension. In fact, many desperate families already struggling to afford gas, but who have no choice but to fill their tank to get to their job or the grocery will likely jump at the chance to fill up as soon as the price drops. While many still can’t truly afford the high price even without the gas tax, they will hit the pump as soon as possible to get gas before market forces drive the price back up or even further.
Increase in demand can itself drive up prices. More people are competing for scare resources, so the supply of gasoline will fall and prices will rise as more consumers seek to take advantage. That puts upwards pressure on the previous step in the supply chain: refineries.
4. Refining margins will increase, possibly making gasoline more expensive
Higher demand for gasoline sends a signal to refineries to make more gasoline. The problem is that refineries are already operating at near maximum capacity to produce the gasoline, diesel, jet fuel, and other distillates they are. Every barrel of oil that comes in is in competition to become gasoline or diesel or another fuel, depending on the refinery’s capacity, demand for the fuel, profit margin, contracts, and other factors.
Increasing gasoline consumption and demand by reducing the price at the pump will send refinery margins higher, which will reverberate back to gas stations as higher prices. Again in context, while refineries are putting out 93 to 98 percent capacity, a new large-scale refinery has not been built in the U.S. since 1977 and dozens have closed in the interim. This means a dwindling number of refineries are refining crude oil into finished products we use every day and deciding the level of gasoline versus diesel and jet fuel to make based on tightening supply and demand signals. None of these underlying factors are addressed by suspending the gas tax.
5. The Highway Trust Fund will go broke
The gas tax is not merely a penalty at the pump, even if it feels like that. It is a separate revenue stream intended to fund the maintenance and safe operation of the nation’s roads and highways. The 18.4 cents from every gallon of gasoline and 24.4 cents from each gallon of diesel pumped goes into the Highway Trust Fund (HTF). Unfortunately, this fund has faced insolvency for years. In the simplest terms, the revenue has not kept up with expenses. There are a few reasons for that, but there is no question that suspending the gas tax would exacerbate the issue and possibly push the fund over the cliff.
The gas tax has not been raised since 1993. Consumers have been paying 18.4 cents per gallon all 29 years since, despite their cars on average going farther on a single gallon, weighing more, and the state of the roadways getting worse. There are several reasons for these factors, including general innovation in fuel efficiency, the introduction of hybrid and electric vehicles, Corporate Average Fuel Economy (CAFE) standards, and more. These conspire to undermine the gas tax as a proxy for road use, meaning the tax does not serve as a user fee to maintain the roads as each driver pays his own way at the pump. Instead it is a shadow of cost recovery for high road usage. On top of this, inflation has destroyed the purchasing power of the gas tax revenue in the Highway Trust Fund (for 29 years, most critically and steeply in the last two years).
The Highway Trust Fund also contains two accounts: the Highway Account and the Mass Transit Account. Money coming in from the gas tax comes in from highway usage, but goes out the door to both accounts. So road-based fuel taxes do not all go to fix roads. Lastly, money from the HTF has largely gone to building new infrastructure rather than maintaining and repairing old roads, highways, and bridges. Together, all of these factors means that the gas tax collected is not nearly enough to actually keep our nation’s roadways safe and maintained. This problem has been growing for years. A suspension of the gas tax would be a nail in the Highway Trust Fund’s coffin.
The Bottom Line
Gas prices are at historic highs because of a confluence of climate and energy policies spanning decades and exacerbated in the last 18 months. From exploration and production permits and leases to pipelines and refinery capacity, the bulk of fuel prices are set long before the pump. The latest action contemplated by the Biden administration seeks to tackle only the last step in the process: the actual price at the pump. By suspending the federal gas tax, there would be an immediate price drop of about 18 cents. But without addressing the many underlying issues, prices would likely rebound and other issues will arise.
Written by Benjamin Dierker, Director of Public Policy
The Alliance for Innovation and Infrastructure (Aii) is an independent, national research and educational organization. An innovative think tank, Aii explores the intersection of economics, law, and public policy in the areas of climate, damage prevention, energy, infrastructure, innovation, technology, and transportation.