In the spring of 2008, as gas prices were heading for record highs, presidential candidates John McCain and Hillary Clinton pushed for a gas tax exemption.
However, later President Barack Obama dismissed the idea as a political “gimmick” designed only to win votes. “The easiest thing in the world for a politician is to tell you exactly what you want to hear,” Obama said in April 2008.
Flash forward 14 years. Obama’s former vice president is now seriously considering a gas tax exemption to lessen the burden of record-high gas prices. President Joe Biden said he hopes to make a decision by the end of this week on whether to support the temporary stay of the 18.3 cents a gallon federal tax.
If it gets through Congress, a gas tax exemption would bring quick – albeit modest – relief to consumers by reducing retail gasoline prices by as much as 18 cents a gallon.
A gas tax exemption would be politically popular. It would also allow the White House to show that Biden is taking concrete action to address one of the biggest issues families face.
Americans are grappling with a 41% rise in gas prices since Russia’s invasion of Ukraine in late February. Record high gas prices have contributed to the worst inflation in 40 years, forcing the US Federal Reserve to raise interest rates so aggressively that markets are in turmoil and recession risks are rising.
However, suspending the gas tax would involve compromises that serve to confirm why Obama and others have criticized such a move as a gimmick – and why it may not get through Congress.
First, a gas tax exemption would do nothing to address the supply shock that is pushing up prices not only for gasoline, but also for diesel and jet fuel.
Second, it would push demand in the wrong direction. At the very least, artificially lowered prices would support gasoline purchases and reinforce the adage that high prices are the best antidote to high prices.
“The risk is that at a time when the price-determining supply-demand balance is already extremely out of whack, it would allow more Americans to take to the streets,” said Patrick DeHaan, director of petroleum analysis at GasBuddy .
Suspension of the gas tax would also be effective encourage the use of gasoline — which runs counter to the Biden administration’s ambitious climate goals, which call for a move away from fossil fuels.
“Barack Obama was right. A tax exemption for gas was a bad idea in 2008 and it isn’t now.” Senator Bernie Sanders wrote on Twitter March.
Like other progressives, Sanders instead advocated a windfall profits tax on the oil and gas industry, a potentially popular move that comes with its own risks.
Mark Zandi, chief economist at Moody’s Analytics, told CNN in a phone interview that a gas tax exemption would not help and could even be inflationary, forcing the Fed to hike rates more aggressively.
“I’m not a fan. They want people to drive less and use less gas. It runs counter to that goal,” he said. “It’s not purposeful.”
Zandi also expressed concern that energy companies might not pass on full savings from a gas tax holiday.
The Moody’s economist served as economic advisor to McCain during the 2008 race when the Arizona Republican advocated a gas tax holiday.
“I probably lost that fight,” Zandi said.
Another problem with a gas tax holiday today: the proceeds from this tax help fund the Highway Trust Fund, which is already tight on funds. The state gas tax has not increased since 1993, when gasoline sold for just over $1 a gallon.
Unless these funds are replaced from other sources, the suspension of the gas tax would deplete resources for highway construction and repairs at a time when prices for these projects are rising due to rising costs for building materials and labor.
Energy Secretary Jennifer Granholm acknowledged the issue over the weekend, telling Dana Bash on CNN’s State of the Union that one challenge with the gas tax suspension is that it “funds the roads.”
Marc Goldwein, senior policy director at the Budget Committee, said a gas tax exemption would be a “mistake”, partly because an increase in demand would raise prices.
“That would be partly self-destructive, not so meaningful for the prices at the pump and expensive for the federal government,” said Goldwein.
Economist Larry Summers, a former Obama adviser and Treasury Secretary under President Bill Clinton, similarly told NBC’s Meet the Press last weekend that a gas tax exemption is “kind of a gimmick.”
And yet Biden officials say the president is seriously considering that as an option.
Treasury Secretary Janet Yellen said last weekend a gas tax holiday was “certainly worth considering”.
If Biden and Congress go down this route, they will face a problem after the tax holiday expires. “It’s going to be very unpopular if prices go back up 18 cents a gallon,” GasBuddy’s DeHaan said.
And that raises the specter of a temporary gas tax suspension turning into a permanent holiday.