Quick Facts: Gas Tax Holiday
- Who has proposed what?
- Would gas purchasers benefit from the gas tax holiday?
- Why can’t refiners simply supply more gasoline?
- How much revenue would the government stand to lose?
- How much might drivers save?
- Didn’t Obama support a gas tax holiday in Illinois? What happened there?
- How do state gasoline taxes compare with the federal tax?
1. Who has proposed what?
Both John McCain and Hillary Clinton proposed gas tax holidays for the coming summer. Barack Obama offered no similar plan.
McCain proposed removing the 18.4 cents per gallon federal tax on gasoline and the 24.4 cents per gallon tax on diesel fuel between Memorial Day and Labor Day, 2008, with no plan to replace the lost revenues.
Clinton proposed an identical gas tax holiday but would replace the lost revenues by imposing an excess profits tax on oil companies.
Obama has criticized both plans for a gas tax holiday, but would also impose an excess profits tax on oil companies.
Neither Clinton nor Obama has specified what would be subject to tax under an “excess profits tax.”
See Howard Gleckman, “Clinton’s Gas Tax Holiday: Chasing Her Tail” TaxVox, April 29, 2008 and Len Burman, “Clintonomics on the Gas Tax Holiday,” TaxVox, May 5, 2008.
2. Would gas purchasers benefit from the gas tax holiday?
Very little, if at all. Consumers might see a small reduction in the price of gasoline but their savings would certainly be much less than the 18.4 cents per gallon reduction in the tax. Removing the tax would initially cause pump prices to fall, which would encourage drivers to want to buy more gas. Gasoline supply cannot respond very quickly, however, and pump prices would rise in the face of consumers wanting more gasoline. The less supply responds to increased consumer demand, the more the price will rise and the less savings will go to consumers.
3. Why can’t refiners simply supply more gasoline?
Lack of excess refinery capacity. Diverse regulations require different blends of gasoline in the winter and summer and across different geographic markets. Refineries retool for the summer blend in the spring and then run pretty much full out through the summer to meet the additional demand from vacation driving. They may be able to squeeze out some additional gasoline but cannot respond quickly. Bringing in additional supplies from other countries similarly takes more than just a few weeks time. The changing formulations also require refineries to predict demand for each blend, and they may hold back on production to avoid being left with unneeded reserves when the summer season ends.
See Len Burman and Eric Toder, “What Were They Thinking???” TaxVox, April 15, 2008
4. How much revenue would the government stand to lose?
About $9 billion. In fiscal 2007, the government collected $25.8 billion in excise taxes on gasoline and another $9.8 billion from diesel fuel sales, for a total of $35.5 billion. Purchases of both fuels rise only modestly in the summer quarter and collections have grown slowly in recent years. Lost revenue would be roughly a quarter of $36 billion, or $9 billion.
5. How much might drivers save?
If pump prices dropped by the full amount of the tax, the average driver might save about $28 over the summer. That’s roughly $9 a month or 30 cents a day.
More likely, pump prices would fall a few cents a gallon at most and drivers would save much less. If the price of gas dropped only 3 cents a gallon, for example, drivers would save an average of 5 cents a day or less than $5 total over the summer.
See Eric Toder, “A Primer on the Gas Tax Holiday,” TaxVox, May 2, 2008.
6. Didn’t Obama support a gas tax holiday in Illinois? What happened there?
Obama did support an Illinois tax holiday. In response to rising gas prices, both Illinois and Indiana enacted gas tax holidays in the summer of 2000. A subsequent economic analysis estimated that between 60 and 70 percent of the tax cut was passed on to consumers in the form of lower pump prices, leaving about a third of the tax savings going to suppliers. Drivers probably saved a larger share of the tax cut than they would in the case of a national gas tax holiday because it’s much easier to reallocate gasoline across state lines than across national borders. In any event, Indiana and Illinois lost a combined $200 million in revenues that would otherwise have gone to finance infrastructure projects. A second analysis estimated that Illinois drivers saved an average of about $20 and those in Indiana half that much.
See Kim Rueben, “The Gas Tax Holiday: Can the States Do Any Better?” TaxVox, May 2, 2008.
7. How do state gasoline taxes compare with the federal tax?
State excise taxes on gasoline range from less than half the 18.4 cent federal rate (8 cents per gallon in Alaska) to nearly twice the federal rate (36 cents per gallon in Washington). The median tax is 21 cents per gallon.
Nine states (Alabama, Florida, Hawaii, Illinois, Nevada, Oregon, South Dakota, Tennessee, and Virginia) also allow local option taxes ranging from 1 to 18.2 cents per gallon.
Kentucky and North Carolina base their taxes on the wholesale price and reset them quarterly. (Kentucky’s rate is 9% and North Carolina’s is 17.5 cents per gallon plus 7%.)
State excise taxes on diesel fuel range from 8 cents per gallon in Alaska to 38.1 cents per gallon in Pennsylvania, with a median of 22 cents per gallon.
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