Biden joins global leaders proposing gas tax holidays in response to rising prices

U.S. President Joe Biden on Wednesday proposed a three-month federal gas tax holiday and called on Congress to “provide direct relief to American consumers.”

Biden blamed high prices on market disruptions caused by the war in Ukraine (he called it “Putin’s Price Hike”) and also asked Congress to come up with funds to replace an estimated $10 billion in lost fuel tax revenue that would otherwise flow into the Federal highway fund.

A measure lifting all (or part) of the 18.4-cent-per-gallon federal gas tax (and 24-cent-per-gallon diesel tax) would follow in the footsteps of dozens of countries that have temporarily cut or suspended their national fuel taxes in response to steep jumps in fuel prices.

Governments from Australia to Zimbabwe have lowered their fuel taxes in recent months, with the goal of giving drivers and trucking companies some relief at the pump. On the other end of the spectrum, countries that subsidize fuel prices have faced major run-ups in government spending.

The United Kingdom was one of the latest to enact changes, with a tax plan intended to raise money for cost-of-living aid to low-income households hardest hit by inflation, while also incentivizing increased investment in oil production and refining infrastructure in the North Sea basin. 

To this point, the United States is one of the few Western nations not to pass any kind of national gas tax package, however, several states and even some counties have passed measures aimed at reducing costs related to fuel.

There are real reasons to wonder whether Biden’s proposal will get through a divided Congress, but first, it’s helpful to remember how we got where we are.

Oil prices have jumped since pandemic trough

Oil prices have been on a roller coaster since 2020. 

You may recall that petroleum prices cratered early that year, when COVID-19 lockdowns worldwide shut down factories and kept hundreds of millions of people home, which wiped out a lot of demand. For a brief moment, in fact, crude oil prices fell into negative territory, with oil sellers having to pay buyers to take oil.

Producers cut output in response — and shortly after that, demand rebounded as lockdowns ended, leaving us with a bullwhip effect that drove prices back up faster than production could ramp up.

Many observers thought we’d see prices stabilize this year and dip somewhat in 2023, as demand and production came more into balance.

Then the war in Ukraine began. Russia is one of the top five global oil producers, with about 11% of the total world volume in 2020. The war led to the United States, Canada, and the European Union cutting off all (or almost all) Russian oil purchases; refineries in other nations stopped doing business with Russia, and some longshore workers refused to unload Russian ships.

We already had a global supply shortage; taking Russian oil out of the picture made it worse. Prices, which were already rising, have skyrocketed.

And so have oil company profits. Exxon made “more money than God” in the first quarter of 2022, and analysts believe companies like Chevron will report major year-over-year increases in the second quarter as well.

With feds deadlocked, five states declare gas tax holidays

So far in the United States, we’ve seen members of Congress float proposals for both a gas tax holiday that would remove the 18.4-cent-per-gallon federal fuel tax, and also a windfall tax to discourage profiteering.

So far, these proposals haven’t gone anywhere. With the Congressional midterm elections coming up this fall, Republicans blaming Democrats for high fuel prices, and Democrats accusing oil companies of price gouging, it’s not likely we’ll see any meaningful bipartisan action this summer, even if a strong majority of Americans support the idea.

Whether having President Biden’s support changes the equation remains to be seen. In the Senate, Minority Leader Mitch McConnell has already declared the idea dead on arrival.

But while the federal government is gridlocked, U.S. voters want their elected officials to do something. In the absence of action at the federal level, five states and even some local governments — are moving to suspend their gas taxes or are at least debating the idea. It’s something elected officials can do to show voters they’re in tune with their concerns over rising costs — and with many states flush after stronger-than-expected rebounds from the pandemic, it’s a way to send some of that surplus back to voters.

The White House on Wednesday called for more states to give fuel tax relief, stating, “the President believes more states and local governments should do so.” 

Will fuel tax holidays actually help?

There is a policy debate over whether fuel tax holidays will accomplish anything. Removing 18.4 cents a gallon wouldn’t hurt consumers, certainly, but it wouldn’t change the overall inflation picture.

And, because our state, federal, and local governments levy excise taxes on oil and gas, there’s no guarantee consumers will see a penny-for-penny reduction in the price per gallon if we remove the federal tax. That’s because excise taxes are levied upstream from consumers and passed on as part of the baked-in price at the gas station pump. Some think oil companies or station owners will keep some (or all) of the 18.4 cents for themselves, rather than pass it along.

(This has been an issue in other countries that levy excise taxes on fuel as well. Peru’s president, for example, issued an explicit call for gas stations to not keep any of that country’s excise tax cuts for themselves. It also was a source of tension when Germany lifted its gas tax.)

Economists say the only way we’re going to get prices down permanently is by lowering demand, and that means keeping gas prices high enough that people actually stop driving. Lowering prices by removing the tax actually encourages people to drive more. Some argue cutting gas taxes could actually drive inflation higher, while also wiping out funding for future infrastructure projects.

This week, in fact, crude oil prices started to fall amid fears that a global economic slowdown will cut into demand for oil. 

Many countries have cut gas taxes

Outside the United States, as inflation has soared, many nations have taken the approach of lifting fuel taxes, and sometimes food taxes, to give their nation’s consumers a bit of a break.

Brazil did it. India cut fuel taxes in May, for the second time in six months. France created a system of fuel tax rebates in April. Germany cut taxes for the summer driving season. Australia cut its gasoline excise taxes in half for six months. South Africa suspended its federal fuel tax for April and May, but prices jumped in June when the tax break expired.

Peru suspended its fuel tax through June 30, and may extend that through December. New Zealand cut its fuel tax 25 cents a liter for three months. South of the Rio Grande, Mexico cut fuel taxes; across the Pacific, so did Vietnam. Japan established a gasoline price subsidy and is considering structural gas tax changes as well.

Singapore did not, with government ministers arguing that since most residents of the city-state don’t own cars, lifting the tax would only benefit the wealthy minority of people who do. And in the Philippines, President-elect Ferdinand Marcos Jr. seems likely to continue targeted subsidies for transport drivers, farmers, and fisherfolk that were established under President Duterte, rather than cut or suspend fuel taxes.

Meanwhile, nations that subsidize fuel prices as a way of keeping living costs down are struggling as those subsidies eat up more of national budgets. Ending the subsidies could be dangerous, however: Kazakhstan tried letting consumer fuel prices rise in January, and that touched off protests that verged on a revolution.

The government of Sri Lanka warned this week that its economy has collapsed and it can no longer afford to buy fuel for its residents. The state-owned Ceylon Petroleum Corp. is $700 million in debt. 

UK levies windfall tax; Canada considers it

While Biden is calling for a gas tax holiday, the United Kingdom has taken a different approach: soaking the oil companies to give to the poor.

The government of Conservative Party Prime Minister Boris Johnson is imposing a temporary additional 25% tax on British oil industry profits, with the money from the tax — expected to be around £5 billion, or $6.3 billion — going to help fund inflation relief payments primarily for low-income households and retired people

At the same time, the British government is offering the oil industry incentives to offset 80% of the new taxes, in return for new investment in oil-production capacity in Britain.

In Canada, Prime Minister Justin Trudeau’s Liberal Party floated something similar: a windfall tax on oil companies that would fund expansion of the nation’s social safety net programs, affordable housing and prescription drug coverage in particular.

The idea generated strong blowback from Alberta, home of the Canadian oil industry. In the end, Trudeau’s government backed away from increasing taxes on the energy sector, but found ways to spend increased revenues brought in by higher fuel prices to fund social programs and pay down budget deficits.

Argentina — which delayed planned increases in fuel taxes earlier this year — is also considering a windfall profits tax to help it fight inflation by reducing government borrowing.

Gas tax holidays add compliance complexity

While there doesn’t seem much support in Washington for Biden’s proposal – from either Democrats or Republicans – his call for states to act to reduce their fuel taxes could put new energy in a subject that’s already being  debated in statehouses, and even city halls, from Florida to Idaho.

However it shakes out, this mishmash of potential short-term federal, state, and local tax relief measures will make excise tax compliance in the oil and gas industry even more complex than it already was. This would be a very good time to read our whitepaper on how excise taxes can impact your profitability.

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