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Experts: Biden's proposed gas tax holiday to offer little relief, may exacerbate road funding woes

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Posted at 3:56 PM, Jun 23, 2022
and last updated 2022-06-23 20:27:46-04

CLEVELAND — Economists and policy experts continue to cast doubt on whether President Joe Biden’s proposed three-month gas tax holiday would provide much financial relief for drivers. Amounting to an average savings of a few dollars per tank, infrastructure experts said the gas tax moratorium may significantly impact future funding for new road projects, maintenance, and safety improvements.

On Wednesday, President Biden, amid growing pressure that has been building since late February, announced that he would seek congressional approval for a three-month pause on the collection of the federal gas tax. The 18.4 cents-per-gallon federal gas tax has remained unchanged since its last increase in 1993. In the nearly 30 years since the federal gas tax has largely been eaten away by inflation; cumulative prices have more than doubled since the early 1990s.

At a price of $4.99 for a gallon of unleaded gasoline, the current federal gas tax accounts for a mere 3% of the total. Suspending the levy would net the average driver a savings of roughly $13 per month, according to the nonpartisan Congressional Research Service. Additionally, economists and industry experts have questioned whether a moratorium on the federal gas tax would actually be reflected in gas prices or whether prices would remain the same, essentially providing oil and gas companies an additional windfall of revenue.

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“You shouldn’t expect to wake up after the tax holiday is implemented and see prices 18 cents lower,” said Patrick De Haan, an economist head of petroleum analysis at GasBuddy. “It depends on how the law is written because gas stations may have two to four days of gasoline that they may have bought that was taxed. The government may have to offer them rebates.”

The history of the federal gas tax is a rather tortured one and it has often been the victim of empty promises from politicians on both sides of the aisle.

In the throes of the Great Depression and a subsequent surge in government spending, Congress passed the first iteration of the federal gas tax, which amounted to a one-cent increase to a gallon of gas. Revenues generated from the gas tax were designed to help trim the national deficit and, later, helped to provide the federal government with the cash needed to sustain the war effort during WWII and the Korean War. It wasn’t until 1956 and the creation of the Highway Trust Fund that gas tax revenues were used to finance road and bridge projects. The creation of the Highway Trust Fund coincided with one of the largest infrastructure projects in United States history: the creation of the interstate highway system.

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In the decades since, the federal gas tax has crept higher, ultimately arriving at 18.4 cents per gallon in 1993. It has remained unchanged since then, despite losing all of its “spending power” due to inflation.

On top of the federal gas tax, Ohio drivers also pay a 38.5-cent motor vehicle fuel excise tax to the state of Ohio. State lawmakers approved a gas tax hike in 2019, which has generated hundreds of millions of dollars in additional revenue. The state also splits that revenue with county governments, townships, and municipalities.

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Even prior to Biden’s announcement, Gov. Mike DeWine has fielded periodic questions about whether he should issue a moratorium on the collection of the state’s gas tax. The topic reached a fever pitch on Wednesday when Biden and DeWine’s democratic challenger, Nan Whaley, urged a suspension of the state gas tax.

DeWine told reporters Thursday that doing so would have significant financial implications.

“$355 million goes to the state and $232 million goes to local governments: that would be the [revenue loss] during that three-month period of time if we did what [President Biden] suggested,” DeWine said, citing an analysis done by Ohio Dept. of Transportation officials. “The consequence would be that it would imperil a number of different projects that we have going. It would be a major major blow.”

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Even a three-month pause would significantly delay some major upcoming state road projects in Northeast Ohio, including interchange improvements at I-77 and Miller Road in Brecksville. Additionally, a potential revenue shortfall would continue to have a ripple effect on projects scheduled for later this decade, namely the extensive improvements to the Cleveland Innerbelt corridor.

Delaying those projects, DeWine said, would also lead to increased costs of the project due to inflation.

“That three-month delay would cost somewhere — in regard to inflation during that period of time — somewhere between a loss of $35 million to $73 million,” DeWine said.

Transportation officials have also pointed to the potential that pausing the state gas tax would severely impact local road projects that are undertaken by county governments and municipalities.

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When lawmakers passed the state gas tax hike in 2019, it generated hundreds of millions of dollars in new revenue that is divvied up at the local level. In 2017, each county in Ohio received roughly $2.4 million in gas tax disbursements. In 2021, two years after the gas tax increase, counties received $3.6 million, according to Ohio Dept. of Taxation data.

Municipalities also saw significant funding increases. Cuyahoga County municipalities, for example, received $54 million in gas tax disbursements in 2021, an increase of about $18 million over 2017’s funding levels.

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The across-the-board revenue jumps end up amounting to a 50% increase.

Ohio Dept. of Transportation officials also said that the vast majority of the state’s gas tax revenues go to fund road repair, maintenance, and safety improvements.

According to its 2021 annual report, the American Society of Civil Engineers (ASCE) estimated that the average Ohio driver spends an additional $544 per year due to poor roads. Experts said any delay in necessary maintenance could, in turn, cost Ohio drivers more in the long run.

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Ohio’s gas tax ranks the seventh highest in the nation. However, according to ASCE, the state also has the second-highest number of bridges; the third-largest freight volume; the fourth-highest number of interstate lane miles, and the sixth-highest total of vehicle miles traveled.

As for the potential impact of a gas tax holiday on federal road projects, if passed, the moratorium would cost the Highway Trust Fund an estimated $70 million a day.

“You know the government is going to have to slow down spending on highways, bridges, and roads as a result,” De Haan said. “Over the course of three months, that would add up to $6.3 billion that would not go into the Highway Trust Fund. The money is going to have to come from somewhere else.”

De Haan and other economists have said that a gas tax holiday has the potential of exacerbating inflation instead of alleviating it.

“This could widen the imbalance between supply and demand. It could incentivize Americans to hit the road and drive demand higher at a time when supply is low,” De Haan said. “It comes down to what the wholesale price of gasoline at the time that the tax holiday is implemented. Theoretically, we could have a gas tax holiday and the wholesale price of gasoline could be going up at the same time, which is then offsetting part of the tax holiday.”