A Gas Tax Holiday Costs Billions, But Consumers See Only Marginal Savings
A federal gas tax holiday — proposed by some lawmakers in response to rising fuel prices and broader concerns about affordability — would significantly increase federal deficits and accelerate the depletion of the Highway Trust Fund. Yet, it would deliver limited savings to consumers, according to analyses from several budget analysts.
Gas prices have soared across the country recently, increasing from a national average of $2.94 at the end of February to $4.53 as of May 14 — a 54 percent increase over 11 weeks, according to the U.S. Energy Information Administration (USEIA). The impact varies across states. For example, Californians saw a 34 percent increase in gas prices, while Ohioans experienced a 61 percent rise. In response, lawmakers have proposed a federal gas tax holiday, which would suspend the federal 18.4-cent-per-gallon tax for a designated period.
The Federal Highway Trust Fund Is Already Facing Depletion in 2028
Federal excise taxes on gasoline and diesel are designated to benefit the Highway Trust Fund, which finances highway, bridge, and transit projects. The Congressional Budget Office projects that the trust fund is already on track to become depleted in 2028. A federal gas tax holiday would significantly worsen the outlook for the Highway Trust Fund. The Committee for a Responsible Federal Budget (CRFB) estimates that a 6-month fuel tax holiday could accelerate depletion of the trust fund by nearly a year, from July 2028 to September 2027.
A Short-Term Gas Tax Holiday Would Cost Billions
If revenue losses are not offset with a reduction in spending, a federal gas tax holiday would increase deficits. According to estimates from the Penn Wharton Budget Model (PWBM), a 4-month federal fuel tax holiday (from June 1 through September 30) could decrease revenues by a total of $11.5 billion. CRFB and the Bipartisan Policy Center estimate that a fuel tax holiday could decrease revenues by a similar amount, but they consider different periods for the tax holiday. CRFB also estimated the additional fiscal impact of increased debt service costs. A 3-month holiday could result in $3 billion in debt service costs from 2026–2036, creating a total deficit impact of $10.5 billion.
A Federal Gas Tax Holiday Would Provide Marginal Consumer Savings
If the full savings from the gas tax holiday were passed on to consumers, the average licensed driver would only save approximately $8.90 per month, according to PGPF calculations based on the most recent data from AAA and USEIA. However, economists have cast doubt on whether fuel prices would decrease by an amount equal to the tax. An analysis from the American Action Forum stated that “the decline in the purchase price should be about half the gas tax,” while PWBM found “the expected pass-through rates are 0.72 for gasoline and 0.60 for diesel.” That means the cost savings for consumers could be even less.
Conclusion
Even with optimistic assumptions that it would be fully passed down to consumers, a federal gas tax holiday would do little to address the problem of energy affordability for Americans. At the same time, it would increase federal deficits and worsen the outlook for the Highway Trust Fund.
Photo by Mario Tama/Getty Images
Further Reading
Budget Basics: What Is the Earned Income Tax Credit?
The earned income tax credit (EITC) is a measure administered through the tax code to address poverty.
What Is Stepped-Up Basis on Capital Gains and How Does It Affect the Federal Budget?
The step-up in basis is a provision in tax law that relates to how assets — such as stocks, bonds, or real estate — are valued and taxed after their owner passes away.
How Does the Capital Gains Tax Work, and What Are Some Proposed Reforms?
While the capital gains tax affects anyone selling a capital asset, higher-income individuals are typically subject to the tax more so than average Americans.