Carola Binder, associate professor of economics at Haverford College, speaks with NPR’s Rachel Martin about the ramifications of a gas tax holiday, which some states are presently discussing.
Consumers in the United States continue to bear the brunt of high inflation and rising gas costs as a result of Russia’s war in Ukraine. According to AAA, the national average is more than $4.30 a gallon. A increasing number of governments are considering suspending gas taxes to provide relief to drivers. Is that, however, the best option? Carola Binder, an associate professor of economics at Haverford College in Pennsylvania, will answer that question.
Welcome to the show.
BINDER, CAROLA: Thank you for inviting me. I’m delighted to be here.
MARTIN: So I don’t have to tell you that anytime any of us goes to the gas station, it just blows our minds. So, how does this idea of a gas tax holiday work? And would it be effective in providing some relief to consumers?
BINDER: There are two sorts of gas taxes that you must pay. There is a federal gas tax as well as a state gas tax. And a gas tax holiday would put a temporary halt to one or both of those. And, you know, at first glance, it appears to be a smart idea because we are all aware of the rising gas prices. And they’re generating a lot of problems for a lot of people. But, in the end, I don’t think it’s a good idea. The reason for this is that, while low-income households bear the brunt of the effects of increased gas prices, high-income households spend the most on petrol. As a result, eliminating or decreasing this tax would provide the greatest amount of assistance to them. So, if we’re concerned about low-income homes that are really suffering to pay their bills now that the gas tax – gas prices are so high, it would be far more effective to simply offer direct aid to a focused set of people rather than lowering the gas tax for everyone. In addition…
MARTIN: You’re referring to something like a direct stimulus payment to these households?
BINDER: Yes, but only to a specific group of homes – right? – only to the lowest-income households who are truly trying to make ends meet now that gas costs are so high.
MARTIN: Doesn’t a stimulus like that, putting more money into the economy, risk increasing inflation even more?
BINDER: A gas tax, on the other hand, has the potential to raise inflation. And so I’m saying that for the same amount of stimulus you could add to the economy, you could either add it in a very targeted way, so that a lot of it went to low-income homes, or you could add it in a way that was spread out among all households. So the amount of cash that states make from – or that the federal government earns from gas taxes, if they’re no longer getting it from the gas tax, they can’t get it – they can’t give it out in terms of stimulus, right? As a result, we don’t require a large aggregate stimulus right now. We don’t require it in the form of reduced gas taxes. We may only require a very targeted, small amount of stimulus aimed solely at low-income households.
MARTIN: I mean, it’s interesting what you bring up, isn’t it? States must still pay their own expenditures.
MARTIN: So, if a gas tax is eliminated, costs must be passed on to the consumer somewhere else.
BINDER: Correct. I mean, they still have bills to pay. A cut in the gas tax alone, with no other taxes introduced, would increase aggregate demand. And since inflation is already so high, the Fed would just have to offset it with other rate hikes in the future.
MARTIN: As you said at the top, there are two alternatives here: a federal gas tax cut or a state gas tax exemption. Would there be a different benefit if one of these things happened but not the other?
BINDER: Well, the federal gas tax is a little lower than the majority of state gas taxes. As a result, I don’t believe there would be a significant change; the most that a federal gas tax cut might reduce gas prices would be roughly 18 cents per gallon. In other states, it may be a little higher.
MARTIN: But that’s still not the case – it wouldn’t make a big impact.
BINDER: No, no, no, no, no, no, no, no, no, no, no, no
MARTIN: Finally, some Democrats are suggesting a tax on oil companies, which are now making a lot of money. This is known as a windfall tax. Is this a decent plan?
BINDER: That, in my opinion, is an even worse notion. This is referred to as the “windfall profits tax.” One reason is that it is unlikely to cut the prices that customers pay at the pump. Worse, it’s likely to reduce domestic oil supplies, right? If these oil corporations are subject to another tax, they will incur additional costs. As a result, the domestic supply of oil is likely to be reduced, which might even backfire and raise consumer costs. As a result, I believe that is a terrible idea.