Gas tax holiday would save drivers at pump, but experts say it could make inflation worse

DES MOINES — Iowa drivers would save more than 18 cents per gallon on gasoline if federal lawmakers paused the federal gas tax, and another 30 cents per gallon if the state did the same.

But not all lawmakers agree a gas tax holiday is a productive way to provide relief to consumers who are being impacted by inflation. Some experts warn it could make inflation even worse.

The average cost Saturday for a gallon of gas in Iowa was $4.66 per gallon, according to AAA. The national average was $4.91. Earlier this year, the national average crept over the $5 mark for the first time ever.

The federal government taxes every gallon of gas 18.4 cents and the state of Iowa 30 cents. If Congress or the Iowa Legislature approved a temporary gas tax holiday, it would reduce the cost for a gallon of gas by that much.

Democratic President Joe Biden on Wednesday called for a three-month federal gas tax holiday, and he called on states to do the same with their gas taxes. Biden said the temporary pause would give consumers some relief during the summer driving season.

“I fully understand that a gas tax holiday alone is not going to fix the problem, but it will provide families some immediate relief — just a little bit of breathing room — as we continue working to bring down prices for the long haul,” Biden said, according to a White House transcriptions of remarks he made in Washington.

Fuel taxes, at both the state and federal level, go into government accounts that fund infrastructure maintenance and construction.

The Federal Highway Trust Fund collects roughly $38 billion in annual revenue from fuel taxes over the past four years, according to federal data; and Iowa’s Road Use Tax Fund has collected between $640 and $700 million in annual revenue from fuel taxes over the past six years, according to state data.

Any suspension of fuel taxes would reduce revenue to those infrastructure funds. Biden is proposing that Congress use other federal revenues to ensure a gas tax holiday has no negative effect on the Federal Highway Trust Fund.

But experts warn that pausing gas taxes could encourage people to drive more, which would increase demand for fuel and thus contribute even further to inflation.

“I’m not a fan. You want people to drive less and use less gas. This works against that objective,” Mark Zandi, chief economist at Moody’s Analytics, said on CNN.

That’s why Iowa U.S. Sen. Chuck Grassley said he opposes a gas tax holiday.

“These issues are only going to worsen the problem by stimulating consumer demand,” the Republican told Iowa reporters earlier this month. “Or it’s not going to reduce consumer demand and in the process is going to reduce productivity.”

Pat Grassley, the senator’s grandson and the Iowa House speaker, said late in the recently concluded session of the Iowa Legislature that he did not believe a gas tax holiday was a good idea because of the potential impact on state infrastructure revenue.

“I don’t necessarily think that that’s going to be on the table because at the same time we have roads and bridges that all Iowans want us to continue to invest in. And to (pause the state gas tax) could potentially jeopardize those continued projects,” the GOP speaker said.

Iowa increased its state gas tax by 10 cents per gallon in 2015. The state transportation department had requested the increase, citing a $215 million annual shortfall in infrastructure revenue.

Both state and federal governments are grappling with how to address long-term infrastructure funding as cars become more fuel-efficient or, in the case of electric vehicles, use no fuel at all.

Total fuel consumption has been declining, leading to a gradual decline in fuel tax revenue, the state’s nonpartisan fiscal services agency has reported.

In Iowa, Road Use Tax Fund revenues have decreased annually from the state’s 2017 budget year ($699 million) to the 2021 budget year ($643 million), even though vehicle registration fees have increased over that same time, according to state data.

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