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Gas prices are at an all-time high. Here are 3 reasons why Democrats' gas tax cut proposal won't do much to curb rising prices or cool inflation

Senate Majority Leader Chuck Schumer of N.Y., speaks during a news conference on Capitol Hill in Washington, Tuesday, Jan. 4, 2022.
Senate Majority Leader Chuck Schumer of N.Y., speaks during a news conference on Capitol Hill in Washington, Tuesday, Jan. 4, 2022.

Susan Walsh/AP


  • Democrats are pitching a temporary gas tax cut to curb rising prices at the pump.

  • But it's not likely to be all that effective at stopping inflation in its tracks.

  • Gas prices may still rise due to supply crunches and some of the benefits may flow to oil and gas companies.

Gas prices hit a record high this week, and there's little sign they will fall sharply in the immediate future.

The average cost for a gallon of gas hit $4.40 on Wednesday, according to AAA data. To combat soaring prices at the pump, some Democrats are still pushing a gas tax holiday. House Speaker Nancy Pelosi effectively took it off the table in late March, but some vulnerable Democrats still want to see it enacted.

One measure — rolled out in February by Sens. Mark Kelly and Maggie Hassan — would suspend the federal government's 18.4-cent tax on every gallon of gas until Jan. 1, 2023. If the holiday passes and works as intended, that would essentially lower the average price per gallon to $3.303 from $3.487.

Surging gas prices have been one of the biggest ills of the economic recovery. While inflation has affected practically every good and service in the US, the price of gasoline is among the fastest growing. 

But there are some big reasons to be skeptical about whether or not the proposed holiday would do much to curb inflation.

A gas tax holiday might not move prices at the pump all that much

Suspending the federal gas tax could modestly lower prices at the pump, but the move would do little to solve the underlying problem. Marc Goldwein, policy director at the Committee for a Responsible Federal Budget, argued that some of the benefits may flow to oil and gas producers since they'd be incentivized to raise pre-tax gas prices to net additional profits.

Like the rest of the economy, gas stations are struggling to match Americans' voracious demand with their strained supply. The gap between the drove gas prices sharply higher through the first weeks of 2022.

EIA

EIA

A tax would lower prices slightly, but the imbalance would remain. Without new oil supply from US drilling rigs or the Organization of the Petroleum Exporting Countries, gas prices would likely keep climbing. 

It's no help that demand is also running hotter than usual. Nationwide demand rose to 9.7 million barrels in the week that ended April 29, according to the US Energy Information Administration. That's up 700,000 barrels  from a year ago.

Lowering gas prices won't make too much of a dent in otherwise skyrocketing inflation

Even if Democrats pass the tax holiday and gas prices temporarily edge lower, headline inflation will probably still hold strong. Gas prices are only one component of the Consumer Price Index, which serves as one of the country's top inflation gauges. Even a major drop in the price-per-gallon would only place a small drag on the overall measure.

The Committee for a Responsible Federal Budget's Goldwein said that consumers with more money in their pockets could worsen inflation in other parts of the economy.

"If what you want to do is defund infrastructure, worsen the climate crisis, add to the deficit, and increase inflationary pressures, then this is a great policy," Goldwein said in an interview. 

Senators from both parties are skeptical and see it as a political gimmick

Passing the tax holiday could also ease intense pressures on Democrats defending razor-thin majorities in the House and Senate. Elevated inflation has been Republicans' favored political cudgel for hammering Democrats and fighting against their spending plans. Pricey gas gave the GOP an even more pointed weapon for skewering the Biden administration.

But it appears that the idea is sputtering out just as Democrats put the keys into the ignition. Some in the party like Sen. Joe Manchin of West Virginia pushed back on its potential benefits, and Republicans derided it as a political gimmick ahead of the midterms. 

While monthly CPI prints can mean little to the average American, it's easier to grasp that gas is roughly $1.50 more expensive per gallon than it was one year ago. Several Senate Republicans raised the issue during a February press conference and frequently pointed to high gas prices as one of the biggest threats to the still-recovering economy. 

 Sen. Mike Crapo of Idaho criticized it as a "gimmick," while Sen. Dan Sullivan of Alaska slammed the policy as "political window dressing from some vulnerable US senators." Even if the holiday lowers prices, it also cuts into government tax revenue and could worsen the country's debt situation, Crapo added.

"You would reduce 18 cents of that $1, so there would be a step there. But what you would create is a greater amount of debt in the US and a greater inability for us to finance our infrastructure," Crapo said.

Read the original article on Business Insider