What Does the Federal Gas Tax Pay For? Biden Seeks Waiver

Mohit Oberoi, CFA - Author
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Jun. 23 2022, Published 9:36 a.m. ET

Over the weekend, U.S. President Joe Biden said that he was considering a federal gas tax holiday as well as gas rebate cards. Now, he has formally asked Congress to suspend the federal gas tax for three months. What does the federal gas tax pay for and how would the federal government meet the deficit?

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The Biden administration has been under fire amid the multi-decade high inflation in the country, which hit 8.6 percent in May. Higher gas prices are among the main reasons for spiraling inflation. The administration has taken steps like releasing oil from strategic reserves and calling upon energy companies to pump more oil, in order to lower gas prices for U.S. consumers.

How much is the federal gas tax?

The federal government currently levies a tax of 24.2 cents per gallon on diesel and 18.4 cents per gallon on gasoline. States also have taxes on gas and we see a wide divergence between taxes in different states. While Alaska has the lowest state gas tax, California charges the highest rate.

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Some of the states already suspended their gas tax and pressure was building on President Biden to act especially amid the upcoming mid-term elections.

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How much money would the government lose from the gas tax holiday?

The federal government would lose about $10 billion after the gas tax holiday. The amount is minuscule considering the fact that the U.S. government spent $6.82 trillion in 2021. Also, the gas tax holiday would hardly move the needle for gas buyers. With U.S. average gas prices just below $5 per gallon, prices would fall by just about 5 percent if gas buyers get the full benefit.

In absolute terms, it would mean a few dollars of savings every month for the average household. Biden admitted that it relief won’t be much but consumers would appreciate every little respite amid multi-decade high inflation.

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What does the gas tax pay for?

The revenues from the federal gas tax fund the Highway Trust Fund, which then pays for different infrastructure projects, including interstate projects. The Biden administration has put a lot of emphasis on the country’s aging infrastructure and last year it finally got the $1 trillion infrastructure bill passed.

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States are set to receive billions of dollars from the federal government for spending on roads and bridges. With the federal gas tax holiday, it remains to be seen if the funding for these projects falls.

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President Biden allays fears of a cut in infrastructure funding.

President Biden has tried to allay fears that the federal gas tax holiday would negatively impact the infrastructure investments in the country. He said, “We’ll still be able to fix our highways and bring down prices of gas.” Biden added, “We can do both at the same time.”

All said, Biden’s proposal to temporarily suspend the federal gas tax needs to get past Congress. While Republicans have been against the idea, some of the Democrats don’t seem too impressed either.

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Former Treasury Secretary Larry Summers, who has predicted a U.S. recession, believes that a gas tax suspension isn't a good idea. He has instead called upon the Biden administration to reconsider the tariffs on Chinese goods that former President Donald Trump imposed.

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