A gas tax holiday would be nothing to celebrate

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A worrying sign of the White House’s bewilderment, President Joe Biden is asking Congress and state governments to agree to a three-month gas tax suspension. Gas tax holidays are generally a poor tool to fight rising prices, but they would be particularly damaging right now.

When the government passes a tax cut, it cannot directly control who benefits. The so-called incidence of the tax cut is determined by the forces of supply and demand. If demand is relatively fixed, the tax will tend to benefit buyers. If supply is more inelastic, more of the benefits will go to sellers. The best the government can do is to observe the impact of land taxation in practice and then adjust policy accordingly.

Take the case of Maryland, which suspended its gas tax for a month last spring. The analysis suggests consumers may have saved up to 26 cents per gallon – with an additional 10 cents captured by sellers. That extra 10 cents per gallon profit encouraged gasoline refiners to push more supply to Maryland rather than other states.

It was this additional supply, not the tax suspension, that lowered costs for Maryland residents. After the tax holiday ended, gasoline prices were higher in Maryland than in neighboring states.

If all 50 states and the federal government enacted a gasoline tax exemption, refiners could not simply adjust supply from state to state; they would just have to produce more gasoline. Yet the lack of refining capacity is precisely the reason that gasoline prices in the United States are so high to begin with.

Biden appeared to acknowledge that fact in a letter he sent to refiners last week urging them to increase production. To do this, they would need to invest time and money. A three-month tax holiday would increase demand now, encouraging consumers to take more driving holidays – before capacity can be increased – then drive demand down later in the year once capacity investments are completed. . Instead of saving consumers money, a nationwide gasoline tax exemption will likely result in even higher profits for refiners in the short term while reducing their incentive to invest in the long term.

Meanwhile, it’s clear the administration wants to reduce oil and gas demand over the next decade, potentially stalling any new investment by the industry. It is precisely this mismatch between the White House’s short-term demands and its long-term policy that has made the entire oil and gas industry hesitant to expand.

If the White House was serious about addressing gasoline shortages, there are steps it could take — but it needs to be more creative.

One such idea comes from Employ America, a center-left think tank that takes the market seriously: the Department of Energy could work with the Federal Reserve to sell insurance to oil producers against falling price. If demand for oil remains high or geopolitics pulls more supply out of the market, the insurance will expire unencumbered. If demand for oil drops, the Department of Energy can take advantage of lower prices to both fill and expand the United States’ Strategic Petroleum Reserve, mitigating the price shock.

Instead, the administration is threatening refiners with antitrust suits, while congressional Democrats mull over a windfall tax. A gas tax exemption — and increased windfall profits — would put Congress and industry on a collision course.

If the Biden administration wants the oil and gas industry to produce more gasoline to drive down prices, it will have to do something it seems reluctant to do: work with the industry to put it in a more dominant position. worldwide. That way, even if demand from the United States drops, the industry can increase its exports. A three-month gas tax holiday would be the worst of both worlds – encouraging more domestic consumption precisely when production is at full capacity, while doing nothing to help the industry expand internationally .

More from Bloomberg Opinion:

• Sorry, but for you, oil is trading at $250 a barrel: Javier Blas

• In US-Saudi Reset, the kingdom holds all the cards: Bobby Ghosh

• Big Oil windfall creates dilemma for industry: Liam Denning

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.

More stories like this are available at bloomberg.com/opinion

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