“I WILL SERVE everything in my power to limit the pain felt by the American people at the gas pump. This is critical to me.” This was stated by Joe Biden when announcing the first round of sanctions against Russia on February 24. That gasoline prices are critical for President Biden is beyond doubt. High inflation is already weighing on his popularity. The increase in oil prices, as a consequence of the sanctions, will only increase the pressures. How can you limit the pain? The structure of sanctions, which ensures that Russian oil can still reach global markets, is part of the answer. Another part may be a proposal that has sparked debate among economists in the United States: a suspension of gasoline taxes for the rest of this year.
This idea was already circulating in Washington weeks before Russian troops flooded Ukraine. With little interruption over the past year and a half, gas prices have risen and risen. Drivers now pay, on average, $3.50 per gallon, the highest since 2014, a reflection of limited supply and strong demand. On February 9, Mark Kelly and Maggie Hassan, two Democratic senators, introduced a bill, the “Gasoline Price Relief Act,” that would suspend the federal tax on pumps for the rest of the year. With the tax set at 18.4 cents per gallon, the temporary suspension would equate to a price cut for drivers of about 5%.
That may sound like a decent discount. However, it would simply return gasoline prices to their level at the end of January, when consumers were already complaining about them. And many economists fear that these meager savings will come at a high cost.
There are three main concerns. First of all, just because the government cuts taxes doesn’t mean drivers get all the benefits. A study of a gasoline tax moratorium in Indiana and Illinois in 2000 concluded that consumers saw prices fall by only about 60% of the tax cut, because the resulting increase in demand increased the pre-tax price of gasoline. gasoline.
Second, it would lead to fiscal drain. Revenue collected from the gas tax goes to the Highway Trust Fund, which helps pay for highway construction and public transportation. The trust fund is already running low, and the tax break would deprive it of about $20 billion, a huge blow, according to the Committee for a Responsible Federal Budget, a watchdog group.
Lastly, the incentives would be perverse for anyone concerned about climate change. Justin Wolfers, an economist at the University of Michigan, wryly proposed a rewording of the tax break proposal: “Would it be a good idea if the government gave people checks in proportion to how much they drive and how fuel inefficient their vehicles are?” . car is it?”
Yet over the past fortnight, two notable economists have offered partial defenses of a gas tax exemption: Both see it as short-term relief for inflation-weary consumers. Paul Krugman, a New York Times columnist, argued that, with refineries well below full capacity, US producers could meet the additional demand without raising prices. However, rising global crude prices would negate any discount. Olivier Blanchard, a former chief economist at the International Monetary Fund, said governments could offer tax breaks or subsidies based on past fuel consumption, thus providing a discount but restricting demand, a smart if perhaps impractical idea. .
In any case, the economic debate may miss the point. The average American household spends about 3% of their annual income on gasoline. A small fiscal saving would barely move the inflation needle. However, prices at the pump look down on drivers in large numbers boldfaced on gas station signs they pass almost every day, making them one of the most concrete manifestations of the pressures. inflationary It’s no coincidence that many of the Democratic politicians pushing for a tax break, including Kelly and Hassan, are in a tight race this year. They want to show voters that they are doing something, anything, to control inflation. Never let questionable policy get in the way of good policy. ■
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This article appeared in the US section of the print edition under the headline “Increasing Votes.”