What is a gas tax holiday? The federal proposal could offer short-term relief for drivers

For months, exorbitant gasoline prices have plagued Americans. The national average price for a gallon of gasoline is just under $5 a gallon, according to AAA data.

But a significant policy change could soon offer some relief to drivers. President Joe Biden on Wednesday called on Congress to pass a gas tax exemption that would run through the end of September.

Suspending the federal gasoline tax, which stands at 18.4 cents per gallon, would almost immediately reduce the price drivers pay at the pump, experts told ABC News. But they warned the policy would cut funds for road and highway maintenance, while potentially worsening an imbalance between supply and demand and pushing prices even higher in the long term.

“As a motorist, I’ll take any price reductions I can get,” said Patrick De Haan, energy analyst at GasBuddy. “As an analyst, I think this could exacerbate imbalances which could lead to higher prices.”

What is the Federal Gasoline Tax?

The federal gasoline tax, first imposed as a 1 cent per gallon tax in 1932, is part of the price drivers see at the pump. The tax gradually increased over the decades following its enactment, reaching its current level of 18.4 cents per gallon in 1993. Since 1997, all federal gasoline tax revenue has gone to the Highway Trust Fund, the main source of federal funding for highways, roads and bridges.

The federal gas tax has never been waived, although a gas tax holiday was proposed by presidential candidates John McCain and Hillary Clinton during the 2008 campaign.

How would a gas tax exemption work?

A federal gasoline tax exemption, which would require legislation passed by Congress and signed by Biden, would suspend the tax for a temporary period. The proposal put forward by Biden on Wednesday calls for a suspension until September.

A handful of states – led by Democratic and Republican governors – have suspended their gasoline taxes to provide financial relief to drivers. Biden on Wednesday called on states to suspend their gasoline taxes if they haven’t already.

But moves only reduce costs by a fraction of the price. In New York, for example, Governor Kathy Hochul suspended a 16-cent-a-gallon tax this month. With the average price of a gallon of gas in New York at $5, according to AAA, the tax relief equates to a 3.2% cost reduction.

Suspending the federal gasoline tax would also reduce the cost of a $5 gallon of gasoline by less than 5%. Still, consumers would likely prefer some relief to no relief.

“I fully understand that a gas tax exemption alone will not solve the problem,” Biden said Wednesday. “But it will provide families with immediate relief, just a bit of breathing space as we continue to work to bring prices down over the long term.”

President Joe Biden speaks at the Eisenhower Executive Office Building in Washington, May 10, 2022.

Bloomberg via Getty Images, FILE

What are the potential downsides of a federal gasoline tax exemption?

There are two main potential downsides to a federal gasoline tax exemption. First, it would deprive the federal government of a primary source of funding for road and highway maintenance. U.S. roads received a D grade last year in a report by the American Society of Civil Engineers. Eliminating the federal gas tax would likely leave them even worse off, experts said.

Second, as the United States grapples with an imbalance between weak oil supply and strong demand, a federal gasoline tax exemption would partially undermine the role that higher prices play in lowering consumer demand. In theory, if gas prices remain high or go even higher, people will buy less gas, which should help balance supply and demand, thereby reducing prices.

But a gasoline tax exemption would almost immediately reduce the price, which could increase demand and further worsen the supply-demand balance, said De Haan, energy analyst at GasBuddy.

“It would potentially cause a jolt in demand at a time when it’s difficult for refiners to meet demand now,” he said.

What happens next?

Biden’s support for a federal gas tax waiver will likely boost momentum in Congress to have legislation enact it. But the passage of such a measure remains uncertain.

One such law, the Gas Prices Relief Act, was proposed by Sen. Mark Kelly (D-AZ). It would eliminate the gas tax until the end of the year and specifically state that price savings should be passed on to consumers.

In addition to Kelly, seven senators supported the bill. So far, no Republican senator has supported him.

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