Opinion: Why a gas tax holiday would be a disaster
The U.S. may be a net exporter of oil, but it remains subject to worldwide supply and demand. Removing the gas tax could lead to a nationwide shortage, while blowing a hole in highway budgets
The memory may seem dim in light of current events, but next month will mark two years since you could fill up your car in Salina, Utah, for $1.15 a gallon.
I didn’t experience that first-hand, but gasbuddy.com told me that was the price at a station just off I-70. In my own neighborhood on that same day, April 23, 2020, I found regular unleaded for $1.89.
Of course, it didn’t matter much. Like me, you were probably quarantined in your home. Few stores were open. You could drive cheap, but where would you go? At the time, I wrote that it was like having the stomach flu and being told you could eat as much as you wanted.
On Thursday, that average fill-up in Utah cost $4.30 a gallon. The economy is running at full speed again. Even the CDC says most of us can ditch the face masks. But Russia’s Vladimir Putin has ignited a senseless war and triggered a boycott of that nation’s plentiful oil. The supply and demand curve has been skewed toward heavy demand. We have plenty of places to go. We’re healthy and hungry, but we can’t afford what we want.
So some states are urging Washington to put the federal gas tax on hold. Those same states are talking about suspending their own state gas taxes. Less tax per gallon equals cheaper gas, and that equals greater movement of people and goods, less overall inflation and more money in the economy. Or so the thinking goes.
Don’t believe it. It’s wrong-headed. Suspending gas taxes wouldn’t accomplish anything, and it might just make the situation a lot worse.
Thirteen years ago, I got a call from T. Boone Pickens. If you’re too young to remember, he was a financier and hedge fund manager who spent the last part of his life passionately arguing for alternative energy sources, especially natural gas.
He called me to voice support for a bill Utah Sen. Orrin Hatch was sponsoring at the time, which would have provided huge incentives for long-haul truckers to convert their rigs to natural gas. His main argument to me was that this was a matter of national security. Nothing, he said, would weaken Iran or Venezuela (two of the worst international actors at the time) more than to remove our dependence on oil. Nothing would take away OPEC’s power over energy costs more decisively.
No matter what you think about Pickens or hedge fund managers, all these years later it’s easy to see he was right. Imagine the world today if oil and gas were minor parts of the U.S. economy.
Which brings me to the reason why a gas tax holiday is a bad idea.
The U.S. is the world’s largest oil producer. The New York Times recently quoted the Energy Department predicting daily production would go from its current (as of March 9) average of 12 million barrels per day to 12.6 million barrels by 2023. The U.S. was a net exporter of oil in 2021, following a trend line toward energy independence that began during the Obama administration, according to factcheck.org.
But even the world’s largest producer of oil remains subject to the world market and the fluctuations of supply and demand. Or, as Daniel Raimi, an economist at Resources for the Future, told Essential Energy and Environment News, “As long as we use oil, we are dependent on every other country in the world. It includes Saudi Arabia and Russia. It also includes major consumers like China and India. Because when their consumption goes up, prices go up for us.”
As a first-year economics student could tell you, the market strives to set the price at which supply equals demand. Right now, high prices ensure there is enough gas to go around.
Suspending the federal gas tax of 18.4 cents per gallon would save the owner of a car with a 15 gallon tank about $2.75 for a complete refueling. But if you were to add Utah’s 31.9 cents in taxes to that mix, the savings would equal another $4.78.
At some point in this artificial reduction, gas would become so cheap that lines would form outside stations and supplies quickly would be exhausted. Either we would have a gas shortage, or the gas companies would raise the price again to match supply with demand, pocketing the extra money that otherwise would go to tax coffers.
This is one reason more than 300 economists, including some Nobel laureates, signed a letter in 2008 opposing a gas tax holiday. Such a thing, they said, “would provide very little relief to families feeling squeezed.”
Perhaps a bigger reason to oppose a holiday is that it would blow a hole in the federal budget for highway construction and repairs and cripple the newly passed bipartisan infrastructure bill, which relies on money from the federal gas tax.
One solution, as many Republicans have suggested, is to increase oil production in the United States. That would take time, however, and oil companies, stung by the boom and bust cycles of recent years (remember that $1.15 gas in 2020), may be reluctant to jump in quickly.
Which brings us back to T. Boone Pickens. The only sure way to defang oil-rich countries run by dictators is to create a world in which their oil doesn’t matter. The sooner we can get there, the better.