A Gas Tax Holiday Would Miss the Point—And the People Who Need Help | Diving In

A gas tax holiday is one of those ideas that
sounds like relief. It sure polls like relief, but it
gets the economics wrong in almost every dimension. And this
isn't just one side being silly, it's bipartisan. So with
all this going on, let's talk gas tax holidays. There
are four things that I want you to know by
the end of this video. First, our current predicament. It
is an attax problem. It's an Iran problem. Second, making
gas cheaper during this sort of supply shock it gets
the economics totally upside down. Let's try to get it
right side up instead. Third, even as relief, this is
a dreadfully roundabout way to target hardship. And Fourth, once
you understand the difference between impact and incidents and yeah,
i'll explain what those mean, you'll see how a policy
that's sold as relief for drivers can end up fattening
oil company profits instead. Look, if folks are having a
tough time, and they absolutely are, let's help them, absolutely
help them. But a gas tax holiday it mistakes the problem,
it blunts the signal, and it can make the shortage
much harder to manage. So let's start with just the facts.
The federal gas tax. It's an extraordinarily precise eighteen point
four since per gallant. The bright Sparks who passed it
thirty years ago, they forgot about inflation, so it hasn't
kept up with the cost of living, which is why
it's so low now. The thing that's actually hammering households
right now is what I'm going to call the Iran tax. See,
that's the increase in gas prices caused by the war,
by supply disruptions, and by the fear
that things might get even worse from here. Before the war,
the average gas price in the US was just under
three bucks a gallon. Right now it's about four point fifty,
So that's an increase of roughly a buck fifty per gallon.
In other words, the Iran tax a buck fifty per
gallon is much larger, about eight times larger than the
federal gas tax, which politicians want to suspend. That's only
eighteen point four since per gallon. That's the first key
point a gas tax holiday. It doesn't get to the
heart of the issue because the heart of the issue
isn't the eighteen point four sins that the Washington taxman
adds it's the much bigger dollar fifty that the Washington
War has added. Here's a simpler way to think about it.
Every time the president steps back from the war or
de escalates, gas prices fall, and they fall dramatically. So
if you want the biggest, fastest, cheapest way to cut
gas prizes, don't fiddle with an eighteen point four and tax.
Reopen the strait of them US car markets instead of
frightening them, Push for peace instead of beating our national chests.
This gets to the heart of the issue. A gas
tax holiday does not. Now I want to give you
one extra bit of context. American gas taxes, and here
I'm going to include not just the federal gas tax,
but also our state gas taxes. Even when we combine them,
they're extraordinarily low by rich country standards. In fact, no
other OECD country has lower gas taxes than we do.
In much of Europe, gas taxes are several bucks per gallon,
not sense. So this isn't a story about Americans being
crushed by some unusually heavy tax. If anything, we can
show too much gas, we can, and we tax it too. Lately,
given the pollution and the congestion that driving causes, that's
not the main point here, but it's worth knowing because
gas taxes are the problem. That is a very American
piece of political folklore. Okay, now let's talk about the
actual economics. If there's not enough fuel to go around,
making gas cheaper is not a solution, simple as that.
Let me try and make the point with some analogies.
If there's a water shortage, don't try and solve it
by subsidizing showers. If there's a traffic jam, don't cut tolls.
If there's a blackout, don't make air conditioners cheaper. And
so if there is an oil shortage, don't cut gas taxes.
That's the whole idea. Look, it's common sense, but unfortunately
it's awfully uncommon. Right now, See what this is is
it's a supply shark. There's less oil reaching the world market,
and so that leads gas prices to rise. Yes it's painful,
Yes it's annoying. Yes it's frustrating, But those higher prices,
they're actually doing a job. They're telling us all that
oil is scarce, that we need to cut back, and
we need to cut back, so we need an incentive
to use a little bit less of that scarce thing.
That incentive. That's what the high price of gas is.
That high price gives you an incentive to combine errands,
to delay a non essential trip to carpol maybe to
drive a little less. A gas tax holiday it blunts
that signal. Here's a key distinction. Helping households is not
not the same thing as subsidizing gas consumption. If you
send cash to a struggling household, you help them pay
their bill. But if you cut the per gallon price
of gas, you're also providing an incentive for them to
buy more gas. One is relief, the other is a
subsidy that encourages demand right when you don't need it.
That's why this policy is so back to front. The
problem is that people want more gas that is currently available,
and the brainiacs in Washington their proposed solution make people
want even more gas. It just doesn't make sense. It
leans against the very mechanism, the price signal, that helps
an economy adjust when something becomes scarce. Okay, now let's
talk about distribution. Basically, you want to ask who actually
gets what from a gas tax holiday. Who would this help.
It's going to come in two parts, But first I
want you to imagine that you've got a fixed pot
of money and you want to help those folks who
are hurting right now. Well, thank you, and I appreciate you.
They appreciate you. As you think about who you want
to help and how much you want to help them.
Would you give more help to someone who's driving an
inefficient SUV compared to someone who's driving an electric vehicle?
Would he give more to the guy who's filling up
a Silverada than to the nurse who carpools. Would he
give more to help a family with two cars than
to a family that can afford only one. Of course not,
But that's exactly what a gas tax holiday does. It
doesn't target need, It targets gasoline purchases. So who gets
the biggest subsidy The people who buy the most gas
and richer households overwhelmingly buy more gas, they own more vehicles,
they drive more miles. We have data from the Bureau
of Labor Statistics from twenty twenty four that shows that
the poorest one fifth of all Americans on average, spent
about twelve hundred bucks a year on gas. The richest
one fifth spent about thirty five hundred bucks a year
that's roughly three times as much. So what that means
is that the gas tax holiday ends up sending three
times as much cash to the richest households as to
the poorest households. Now, I know that's not the whole story.
Some lower income families really do depend heavily on a car,
and for them, higher gas prices really buy it. Absolutely,
But if that's your concern, that's a case for targeted aid.
If you really genuinely want to help those in need
through an energy shock, you'd help them based on their hardship,
not based on gallons burned. Okay. The second part of
who wins and who loses is where economics gets really useful.
This is the difference between the impact of attacks and
the incidence of attacks. Let me translate on and not
everyone speaks economics. The impact of attacks is who legally
pays the tax. The incidence is actually who ends up
bearing the cost after prices are just impact gets the headlines.
You have to pay extra for your gas. The impact
is on you. Incidence is what actually matters for your life.
Impact and incidence are different. Now politicians they often talk
as though suspending the gas tax means drivers will get
their gas for a full eighteen point four cents less.
That's impact thinking. It's very naive impact thinking. It's the
way lawyers think. And I think part of the problem
is so much a congress are lawyers. If you want
to know what's actually going to happen, lawyers reckon, They reckon,
you just read the law. But we economists, we know
there's a highest set of laws at work here, the
laws of supply and demand. So economists focus instead on incidents.
Incidents asks the smarter and more relevant question, what happens
to the price that you'll actually pay once markets ads
say to a gas tax or a gas tax holiday.
And in this case, the logic's pretty straightforward. Suppose you
cut the gas tax, as everyone in Washington to think
is a good idea. Drivers are going to see a
lower price, and they see a lower price of gas,
they're going to want to drive a bit more, buy
a bit more fuel. But the tax cut doesn't create
any more oil. It doesn't reopen shipping lanes, it doesn't
build refinery capacity, it doesn't cause tankers to suddenly materialize.
So now you've got more demand chasing the same constrained
supply and what happens when more demand chases the same
scarce product, the underlying market price rises, and so some
of the tax cut is actually going to get bit
away into higher gas prices. Those higher prices, they're going
to end up helping suppliers and the suppliers of those suppliers.
So that means part of your gas tax holiday will
actually end up in the pockets of producers and refiners
and wholesalers and retailers. There's a bitter irony in all
of this. Oil companies are already having a magnificent time
of all of this. Their product just became scarcer and
more valuable because of trouble in the Middle East. On
the flip side, families are hurting, drivers are gretting their
teeth the pump and the genius bipartisan answer is, let's
stimulate more demand for the oil company's scarce product. It's
a way of helping oil companies raise their prices. And
that is how some of that eighteen point four cent
tax cut will end up in air pockets instead of yours.
So yeah, a policy marketed is relief for the little
guy ends up helping the oil industry fatten its bottom line.
Even further, it's not just bad optics, it's bad economics. Now,
you might ask me at this point to be a
little bit precise. For each dollar that we have tax
cuts we offer, how much would end up in the
pocket of drivers versus in the pocket of oil companies.
And I'm going to be honest with you, it's actually
a pretty tough question to answer. I spent a couple
of days digging through the research studies on them. And
you know that's why I'm such good fun at dinner parties.
I get to talk about that, and I put that aside.
Most of the best evidence comes from when individual states
have had individual state specific gas tax holidays. Now here's
the thing to remember about studies like that a state
gas tax holiday isn't exactly the same thing as a
nationwide holiday. In the middle of a wartime oil shortage.
You see, at the state level, fuel can flow in
from elsewhere in the country, so supply is more flexible.
At the national level, it can't. So these state level
estimates are probably an upper bound on how much relief
customers would actually get from a federal gas tax holiday. Okay,
so what do we know The folks at the Penwharton
budget model terrific set of nerds. They reckon that consumers
get to keep about seventy two cents of every dollar
of a state specific gas tax holiday. The rest goes
to the oil companies. They also say absolutely correctly that
this is an upper bound on the effect of a
national gas tax holiday, So that means the amount you
get to keep is going to be less than seventy
two cents than the dollar. It's hard to be precise
about this, so I'm just going to give you a
back of the envelope guess. I reckon about half of
the money we spend on a gas tax holiday we'll
end up in the pockets of consumers, and maybe half
will go upstream to oil companies and suppliers. I want
to be clear, that's a guess. It's not a precise estimate,
but we do know it's probably less than seventy two percent,
and so my fifty to fifty guess is a much
more sensible benchmark than pretending that drivers are automatically going
to pocket the full eighteen point four cents of every
eighteen point four cent tax cut we offer during a
gas tax holiday. Hey, if you've been around a while
some of this might actually sound kind of familiar, and
that's because it is. We have done this exact silly
dance before. Back during the two thousand and eight presidential election,
John McCain proposed a gas tax holiday. Hillary Clinton was
in a primary against Barack Obama, and she said, oh, yeah,
that's a terrific idea. Obama actually opposed it. Now economists
lined up against the idea. I wrote a really cranky
piece basically said not just that this is a bad idea,
but that no one would be able to find a
coherent economist willing to defend it. It's such a bad idea.
Now that piece actually got a fair bit of play.
George Stephanopolos actually posed that challenge directly to Hillary Clinton
on TV, asking her to name one credible economist who
supported her proposal, and she couldn't. In fact, she famously said,
I'm not going to put my lot in with economists. Sorry, Hillary,
you should mate. There was a PBS news our Bridge
who told one of their guests that they tried to
get someone to support the gas tax holiday in order
to show balance, but they literally couldn't find anyone willing
to argue the other side. Of the case. So I
tell you all that so that you know I'm not
giving you some fringe theory. Just about every economist sees
the world this way. And if I sound a bit
annoyed right now, honestly, it's because I am. We've seen
this movie before, same gimmick, same fake relief, same nonsensical politics,
same refuse to ask where the policy gets to the
heart of the problems we actually face. Look, apparently I've
been complaining about gas tax holidays for eight eight years.
When I started, I thought this was a one off,
a strange blick of bad policy that occurred during election season.
Once it was exposed, it would quietly go away. I
was young, I was optimistic, and I was wrong. So
here we are again, and I'm going to tell you
I'll probably be here again next time this comes up again, too. Look,
let's try and figure out if there's a broader lesson here.
One part of it might be that what matters when
you think about taxes and subsidies is impact versus incidents.
And I think that really matters a lot. Taxes and
subsidies can be useful, but they don't always land where
you want them to. Again, those pesky forces of supply
and demand. The broader point still is I want you
to go away realizing you can't evaluate policy both vibes alone.
You can't stop at oh Man, this sounds like it
might help struggling families. You've got to ask the harder questions.
What problem is it you're trying to solve, how markets
will respond, who will get the money, who gets left out,
and whether you're making the underlying problem better or worse
on each and every one of those scores. The gas tax,
holidays a bad idea, But asking these questions and providing answers,
that's what economics is for. It's not to drain the
humanity out of policy. Quite the opposite. It's to make
sure the humanity actually lands where it's needed. So, yes,
have a soft heart, but also have a hard head.
Help people, absolutely, but help them in ways that actually
help