Why a gas tax holiday is a bad idea
Three reasons, according to Greg Mankiw for which the idea for a gas tax holiday should be rejected:
- Putting more money in peoples’ pockets with any kind of tax cut would increase aggregate demand. It would thereby undermine the Fed’s program to get inflation under control.
- The incidence of the tax cut would fall partly on producers rather than consumers, depending on the elasticities of supply and demand. If it is true that refiners are near capacity, as reports suggest, then supply is relatively inelastic. That means the tax reduction would mainly benefit producers.
- Given all the externalities associated with driving (climate change, congestion, accidents), the existing gasoline tax is below the optimal Pigovian level. Reducing it would move the tax system in a less efficient direction, That is, it would encourage people to drive more, exacerbating the negative externalities.
Three Reasons Why a Gas Tax Holiday is a Bad Idea
By: Greg Mankiw – Harvard University
The experience of states which enacted the gas tax holiday
Gasoline taxes in the United States include a federal excise tax of 18.4 cents per gallon as well as state excise taxes and other taxes and fees at state and local level. Three states, Maryland, Georgia, and Connecticut have enacted gasoline tax holidays since March 2022 and for a period of around three months. He and Sun looked at the effect of this policy on consumers and found:
- In Maryland, 72 percent of the tax decrease passed on to consumers in the form of lower prices. But after the gasoline tax holiday expired on April 17, gasoline prices in Maryland became higher than what they would have been if the gasoline tax holiday never occurred;
- In Georgia, 65 percent of the tax decrease was passed to the consumers while in Connecticut the a pass-through rate was 71 percent.
Effects of a State Gasoline Tax Holiday
By: Zheli He, Xiaoyue Sun – Wharton School, University of Pennsylvania
Better alternatives to a gas tax holiday
Shang-Jin Wei is suggesting three different alternatives that could mitigate the impact of high oil prices on Americans:
- Transfer cash directly to low- and lower-middle-income families using the same amount of government revenue that would be foregone as a result of a gasoline tax waiver;
- Allow US oil companies and refineries to export only a portion of additional production above the pre-war level. This implies that oil producers would be prohibited from exporting any output before their domestic sales reach pre-war levels. But at the same time the higher international prices would encourage companies to increase production.
- A combination of a gas tax holiday with a windfall tax on oil companies.
Three Better Alternatives to Biden’s Gasoline Tax Holiday
By: Shang-Jin Wei – Columbia University
