The latest source of inflation pain for consumers is gas prices. With a national average of $4.30 per gallon, filling up is the most expensive in nearly four years, according to AAA, putting renewed focus on whether lawmakers should act.
Whenever fuel prices rise, as they did in 2008, 2022 and now, calls for a federal gas tax exemption tend to follow. However, when then-presidential candidates John McCain and Hillary Clinton supported a gas tax holiday in 2008, and former President Biden called for a 90-day suspension of federal gas taxes in 2022, Congress rejected the idea in both cases.
Will it be different this time? President Trump has said that such relief “is in our pocket if we believe it’s necessary,” while suggesting that states should take the first step. In March, Sens. Mark Kelly (D-Ariz.) and Richard Blumenthal (D-Conn.) introduced legislation to suspend the federal gas tax until Oct. 1, 2026. The bill was sent to the Senate Finance Committee for consideration, and a similar bill is moving through the House.
Several states are also considering, or have implemented, temporary exemptions from their share of fuel tax revenues.
If enacted, will the gas tax exemption significantly reduce gas prices?
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How much is the federal gas tax and how much do you pay?
The federal fuel tax is 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. These taxes represent more than 90% of the revenues that support the federal Highway Trust Fund.
The HTF pays for the construction and maintenance of the interstate highway system and other federal highways, as well as federal public transportation projects.
How much do state taxes add to a gallon of gasoline?
In 2023, state gas taxes ranged from 8.95 cents in Alaska to 62.9 cents in California (where gas barely hit $6 per gallon), according to the Urban-Brookings Tax Policy Center. The 50-state average is 28.6 cents per gallon.
Those revenues go primarily to the construction and maintenance of state and local highways, roads and streets.
Like federal fuel taxes, state gasoline taxes have been declining as vehicles become more fuel efficient. This is already putting pressure on budgets for road improvements.
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Where are gasoline tax breaks currently in effect?
While a federal gas tax exemption is still being considered, some states have already taken action.
Indiana was first. On April 8, the state suspended the gas use tax collected by distributors for one month. “The gas use tax is collected at the dealer level. It is not a retail-level tax collected at the pump,” the Indiana Department of Revenue said in a notice announcing the tax break. “By suspending tax collection at the dealer level, the price will drop accordingly once the fuel is sold at the pump.”
Georgia suspended its 33 cents per gallon fuel tax from March 20 to May 19.
Utah followed, but will only reduce its 38-cent-per-gallon gas tax by 6 cents starting July 1.
However, research shows that tax breaks do not result in a penny-for-penny discount for consumers. In 2022, gas tax breaks in three states gave consumers less than 100% savings, according to a Penn Wharton analysis:
And the cost savings did not last throughout the entire gas tax exemption period, the study found, adding: “Suppliers can capture some of the economic benefit of the tax reduction if pump prices do not fall by the full amount of the suspended tax.”
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The Case for a Gas Tax Exemption
Higher gas prices are putting pressure on household budgets. Supporters of a gas tax exemption, such as Sen. Doug Mastriano (R-Pa.), say it would “provide immediate relief to families already stretched thin.”
In South Carolina, Alabama and California, advocates are working to pass state legislation for gas tax exemptions. Outside the United States, Canadian Prime Minister Mark Carney recently announced a pause in federal gas tax collection until September 7.
“Cutting the gasoline and diesel tax… is a responsible measure that will reduce operating costs for truckers and businesses in the food, agriculture, housing, construction and delivery sectors,” a statement from the prime minister’s office said.
The case against the gasoline tax exemption
Critics argue that suspending gas tax collection would dramatically increase the federal deficit (by $12 billion for a five-month tax holiday, according to the Bipartisan Policy Center) and have little positive impact on consumers.
The Committee for a Responsible Federal Budget, a bipartisan nonprofit think tank, says a gas tax holiday “would cost billions per month” and would only “marginally” reduce consumer costs.
“Meanwhile, producers would respond by increasing pre-tax prices and the stimulative effect of the holiday would put upward pressure on inflation or interest rates, consuming some of those savings,” the CRFB added.
Adam Hoffer of the Tax Foundation adds another concern: “Pausing fuel taxes makes it harder to fund roads and highways and does nothing to address the underlying problems that drive up prices.”