Too much inflation crushing your summer vacation plans? President Joe Biden has a vacation for you – at the gas pump. Biden is set to ask Congress for an emergency three-month federal gas tax easing. By waiving that 18.4 cents per gallon tax, and just before the peak of the July 4 driving season, Biden hopes to be credited for saving you three or four dollars every time you fill up.
It’s not a huge saving. The federal gasoline tax has not changed since 1993 and is not indexed to inflation. Yet, according to the Congressional Budget Office, it brings in $45 billion a year, which covers nearly all of the $47 billion in federal highway spending last year. As Energy Secretary Jennifer Granholm said on TSWT, “Part of the challenge with the gas tax, of course, is that it funds the roads.” Ultimately, Congress will have to find another pocket to dig in to replace the roughly $10 billion in highway funding. This move would essentially remove user fees that fall on those who drive the most and instead socialize the cost on all federal taxpayers, including electric vehicle drivers who dodge the gas tax today.
Biden pushed back on the idea in February, but Senator Mitch McConnell derided it as a gimmick. As Harvard University economics professor Jason Furman tweeted on Tuesday, “Whatever you think of the merits of a gas tax exemption in February, it’s a worse idea now. Refineries are even more constrained now, so supply is almost totally inelastic.
President Barack Obama rejected a gasoline tax exemption during the 2008 oil price spike, writing in his memoir, A promised land, “…I was sure consumers wouldn’t see much of it. In fact, gas station owners were just as likely to keep prices high and increase their own profits as they were to pass the savings on to motorists. »
Above all, there is no real mechanism to ensure that the savings go where they are intended – to normal people, rather than to the demonized oil companies. Alex Muresianu of the Tax Foundation notes that a tax holiday “could exacerbate the misalignment between demand and supply” by stimulating increased demand for gas and, therefore, higher prices, which would counterproductively add to the woes of global inflation.
Gilbert Metcalf, an economics professor at Tufts University, summed it up in an email exchange. “As much as I understand the Biden administration’s desire to dull the pain of higher prices, a gas tax holiday is a terrible idea. In addition to giving up valuable revenue, this will increase demand and only increase gasoline prices. This will in turn lead to somewhat higher oil prices – not what we want to do if we want to stifle Russia’s main source of export revenue. To drive prices down, we need to stimulate supply, not demand. Working with the Saudis is unpleasant but important given the importance of fighting inflation and supporting Ukraine.
Martin A. Sullivan of Tax Analysts writes that there are four good reasons for a gas tax. First, as user fees for road repairs, payment in line with the user-pay principle (although EV drivers are skating, for now). Second, as an incentive to drive less, by reducing traffic congestion. Third, as an effective tax on carbon emissions; 18.4 cents per gallon equates to an implicit carbon price of $20 per tonne of carbon dioxide emitted. Fourth, a gasoline tax can protect against price shocks by slightly reducing demand for a volatile product.
Sullivan marvels that, given all these things a gas tax is good for, it would be counterproductive to undo them. A tax holiday would do the opposite of what we need in a time of historically tight oil markets: it would encourage more driving, more congestion, more emissions, and less money set aside for repairing highways. Even if all other things remain equal and all savings are passed on to the consumer, removing the tax only hurts the adjustments the country needs to make to transition to a low-carbon economy.
“If our only goal is to control inflation, lawmakers should rule out a gas tax exemption, alternative energy tax incentives, and child credit extensions,” Sullivan writes. Indeed, raising taxes would do more to fight inflation, by discouraging car driving. “It won’t help these lawmakers win elections, but it’s the bitter truth.”
Naturally, state-level lawmakers are considering their own tax exemptions, with the potential to save their people far more. State gasoline taxes range from 9 cents per gallon in Alaska to over 50 cents in Pennsylvania, Illinois and California. Connecticut, Georgia, Maryland, New York and Florida have already reduced their gasoline taxes. Pennsylvania plans to cut its tax to 57.6 cents per gallon, the highest in the nation, in an effort to replace lost revenue with a state tax surplus. Similarly, Minnesota could afford to suspend its 28.6-cent tax thanks to a $9.3 billion surplus last year. California politicians seem more interested in slashing citizen rebate checks to ensure that any savings go directly to voters rather than the oil companies. Indiana, which has already issued $125/month checks to people under an “automatic taxpayer refund law,” is considering raising that amount to $350 per person per month.
As bad as a gas tax exemption might be, it’s better than some of the other counterproductive energy policies the administration has recently considered.
Biden lambasted oil refining companies for not producing more gasoline and wants them to “justify making $35 billion in the first quarter.” Over the weekend, Biden said, “I want an explanation why they’re not refining more oil.” The administration has threatened to use the Defense Production Act to somehow force refiners to supply more fuel. Refiners respond that they are running near capacity but producing less fuel than before the pandemic because low prices two years ago forced plants to close or convert. A Phillips 66 plant in Louisiana has been under repair since Hurricane Ida last September, others are turning to making renewable diesel fuel. Last year, Biden’s EPA canceled permits that would have allowed the continued operation of the 200,000 barrel-per-day Limetree Bay refinery in the US Virgin Islands. Lyondell Basell plans to close its 263,000 bpd refinery in Houston by the end of the year. Does Biden want to nationalize old refineries and subsidize their economy?
And then there is the idea of limiting the export of oil and domestic fuels. The concept is that if we stop sending our oil and gasoline overseas, we should have enough at home. A terrible idea, writes Manav Gupta, an analyst at Credit Suisse. Consider that the United States exports about 2 million barrels per day of gasoline, jet fuel, and diesel, and another 2.5 million bpd of fuel oil, propane, propylene, and other petroleum products. Banning these exports would break all sorts of contracts, and “probably lead to massive product shortages globally. This would have a greater impact on global product supply than the Russian invasion of Ukraine. If the United States stopped its exports to Canada, Mexico, Brazil and Korea, it might reduce its trade with the United States, which “would be considered an unreliable supplier”. The US oil export ban was lifted in 2015 by an act of Congress, with Obama’s signature. Biden doesn’t have the voices to push him today.
Progressives in Congress have already introduced bills that would impose a windfall tax on oil companies on their profits from high oil prices. Reasonable people see this as an affront to an industry that saw the price of its commodity drop to zero just two years ago. Confiscating the rise would infallibly discourage US frackers from drilling more, which we need at a time when inventories are at five-year lows, Russia’s export crunch is just beginning, and the strategic petroleum reserve is being depleted. run out. at the rate of 1 million bpd. (Also, if you really want to see stellar profit margins, check out Apple and Microsoft.)
Remember that the surest solution for high prices is high prices. Indeed, a cursory glance at the oil futures markets would lead you to believe that high gasoline prices are only transitory. The West Texas Intermediate oil future is $91.70 per barrel per year from now, and below $70 in 2027. This implies that the market believes that a combination of peace in Ukraine, economic recession and growth in supply will emerge to significantly reduce oil prices. Soon, the best strategy for Biden may simply be to do nothing and hope for the best.
Presidential inaction would be preferred by oilmen like Bud Brigham, chairman of publicly traded Brigham Minerals, which drills in the Permian Basin. He laments that Biden’s decisions, particularly the release of oil from the Strategic Petroleum Reserve, are “damaging to markets and national security” because they interfere with price signals and “proportionally reduce the supply response needed.” – including reducing free cash flow for our industry to reinvest.” Brigham says, “A hostile political narrative neutralizes capital investment.”