Harvard economists say Biden’s gas tax holiday is a bad idea—but something else could work better

With gas prices soaring more than 60% year over year to a record national average of just under $5.02 per gallon last week, the Biden administration is hoping a suspension of the 18.4-cents-a-gallon federal gas tax and 24.4-cents-a-gallon diesel tax will help ease consumers’ pain at the pump.

The gas tax holiday will require congressional approval, but even if it does go through, the effects on gas prices could be limited.

“Whatever you thought of the merits of a gas tax holiday in February it is a worse idea now,” Furman, who served as the chair of President Obama’s Council of Economic Advisers, said on Tuesday. “Most of the 18.4-cent reduction would be pocketed by industry—with maybe a few cents passed on to consumers.”

Furman argued that Biden’s cut would be split between suppliers and consumers, and even in a best-case scenario, consumers could expect to see “one-third of the benefits.”

“This is standard price incidence theory in economics—the government cannot decide who gets the benefits of a tax cut, it gets split between the two parties based on the responsiveness of supply and demand,” Furman said. “If supply is not very responsive to price (the situation now) then most of the benefit of the tax cut will go to suppliers.”

But there is something that could actually help, one of Furman’s colleagues said.

Dr. Peter Blair, an economist at the Harvard Graduate School of Education, said on Wednesday that the gas tax is a “bad idea” and instead the Biden administration should focus on reducing the cost of public transportation.

Dr. Blair pointed to a study from the University of California, Berkeley’s Haas School of Business that shows ridership on public transit increases substantially when governments act to reduce costs. That could reduce the demand for gas, he argued, lowering prices for consumers.

“If we want to make something cheaper: Reduce the cost of public transportation. This reduces gas demand, preserves choice, and is flexible public policy,” he said.

Although that wouldn’t undo the dramatic rise in gas prices overnight, it’s a more practical approach to addressing the problem that is rooted in economic theory.

Just a gimmick? Or a small part of the solution?

Other economists have gone even further in speaking out against a suspension of the federal gas tax, with former Treasury Secretary Larry Summers, also a Harvard colleague of Furman’s, saying he is “no fan of the gas tax holiday” on NBC’s “Meet the Press” on Sunday.

“I think that`s kind of a gimmick, and eventually, you have to reverse it,” he said.

Critiques of the Biden administration’s decision to institute a federal gas tax are particularly pointed due, in part, to comments made by former President Obama during the 2008 presidential campaign.

Obama called gas tax holidays a “gimmick” that allow politicians to “pat themselves on the back and say they did something.” 

The quote has led Republicans, including West Virginia Governor Jim Justice, to call Biden’s move a “publicity stunt,” while some Democrats have noted that the gas tax is also a critical source of funding for road construction that will be sorely missed. U.S. roads received a D grade last year from the American Society of Civil Engineers in a report that revealed some 43% of public roadways are in poor or mediocre condition.

Biden administration officials said on Wednesday that the tax holiday will “have some impact” on road construction, but nothing major, and that they are looking for alternative revenue sources to make up the gap.

Amid the chorus of gas tax holiday critiques from economists, Biden administration officials also acknowledged that the gas tax holiday “isn’t going to solve the whole problem,” but argued it will help give Americans some much-needed breathing room from sky-high prices.

“It is something that can be done to take a real step to relieve some of that pain at the pump, and we see it as part of a suite of policies that are designed to provide that relief, including policies that focus on the supply side,” Amos Hochstein, senior adviser for energy security at the State Department, said on Wednesday, CNN reported.