What is a gas tax exemption? The federal proposal could offer drivers short-term relief

For months, severely high gas prices have confused Americans. The average price for a gallon of gas nationwide is just under $5 per gallon, AAA data offers.

But an important policy change may offer drivers some relief soon. president Joe Biden on Wednesday called Congress To pass a gas tax exemption until the end of September.

Experts told ABC News that suspending the federal gas tax, which is 18.4 cents a gallon, would almost immediately reduce the price drivers pay at the pump. But they cautioned that the policy would cut money for road and highway maintenance, with the potential to exacerbate the imbalance between supply and demand and push prices higher in the long run.

“As a motorist, I’ll take whatever price cut I can get,” said Patrick de Haan, Energy Analyst at GasBuddy. “As an analyst, I think it could exacerbate imbalances that could drive prices up.”

What is the federal gas tax?

The federal gas tax, first introduced as a 1-cent-per-gallon tax in 1932, is part of the price drivers see at the pump. The tax increased gradually over the decades that followed its enactment, reaching its current level of 18.4 cents a gallon in 1993. Since 1997, all revenue from the federal gas tax has gone to the Highway Trust, the primary source of federal funding for highways, roads and bridges.

The federal gas tax was never suspended, despite the proposal to reduce the gas tax by presidential candidates John McCain and Hillary Clinton during the 2008 campaign.

How will the gas tax credit work?

A federal gas tax holiday, which requires a law passed by Congress and signed by Biden, would suspend the tax for a temporary period. The proposal Biden made on Wednesday calls for suspension until September.

A handful of states — led by both Democratic and Republican governors — have suspended their gas taxes as a way to provide some subsidies to drivers. Biden on Wednesday called on states to suspend gas taxes if they have not already done so.

But the movements reduce costs only at a fraction of the price. In New York, for example, Governor Kathy Hochhol suspended this month A tax of 16 cents per gallon. With the average price for a gallon of gas in New York at $5, according to AAA, the tax credit amounts to a 3.2% cost reduction.

A suspension of the federal gas tax would reduce the cost of 5 gallons of gas by less than 5%. However, consumers likely prefer some comfort over no rest.

“I fully understand that the gas tax credit alone will not solve the problem,” Biden said on Wednesday. “But it will provide families with some immediate relief, just a little breathing room as we continue to work to bring prices down in the long term.”

Photo: President Joe Biden speaks at the Eisenhower Executive Office Building in Washington, May 10, 2022.

President Joe Biden speaks at the Eisenhower Executive Office Building in Washington, May 10, 2022.

Bloomberg via Getty Images, FILE

What are the potential downsides of the federal gas tax credit?

There are two main potential aspects of the federal tax credit on gas. First, it would deprive the federal government of an essential source of funding for road and highway maintenance. American roads were awarded a D grade last year in Report from the American Society of Civil Engineers. Experts said abolishing the federal gas tax would likely make them worse.

Second, as the US struggles with the imbalance between low oil supply and high demand, a federal tax break for gas would partially undermine the role that higher prices play in lowering consumer demand. In theory, if gas prices continue to rise or go up, people will buy less gas, which helps balance supply and demand, thus lowering prices.

GasBuddy’s energy analyst, De Haan, said the gas tax credit would reduce the price almost immediately, which could increase demand and worsen the supply and demand imbalance.

“This could cause a potential shock at a time when it is difficult for refineries to keep up with demand now,” he said.

what happened after that?

Biden’s support for repealing the federal gas tax is likely to boost momentum in Congress for a law to be enacted. But the passage of such a procedure is still uncertain.

One of these laws, is Gas Price Reduction Act, was proposed by Senator Mark Kelly (Democrat from the ground up). It will eliminate the gas tax through the end of the year, and specifically stipulate that price savings must pass to consumers.

In addition to Kelly, seven senators supported the bill. So far, none of the Republican senators have supported it.