A Gas Tax Holiday Would Miss the Point—And the People Who Need Help

Added: 2026-05-28

[00:00:00]A gas tax holiday is one of those ideas that sounds like relief. It sure polls like relief, but it gets the economics wrong in almost every dimension. And this isn't just one side being silly.

[00:00:15]It's by partisan. So with all this going on, let's talk gas tax holidays.

[00:00:29]There are four things that I want you to know by the end of this video. First, our current predicament isn't a tax problem. It's an Iran problem. Second, making gas cheaper during this sort of supply shock, it gets the economics totally upside down.

[00:00:49]Let's try to get it right side up instead. Third, even as relief, this is a dreadfully roundabout way to target hardship. And fourth, once you understand the difference between impact and incidents, and yeah, I'll explain what those mean, you'll see how a policy that's sold as relief for drivers can end up fattening oil company profits instead.

[00:01:16]Look, if folks are having a tough time, and they absolutely are, let's help them. Absolutely help them. But a gas tax holiday, it mistakes the problem. It blunts the signal, and it can make the shortage much harder to manage. So, let's start with just the facts. The federal gas tax, it's an extraordinarily precise 18.4 cents per gallon. the bright sparks who passed it 30 years ago, they forgot about inflation. So, it hasn't kept up with the cost of living, which is why it's so low. Now, the thing that's actually hammering households right now is what I'm going to call the Iran tax. See, that's the increase in gas prices caused by the war, by the war, by supply disruptions, and by the fear that things might get even worse from here. Before the war, the average gas price in the US was just under three bucks a gallon. Right now, it's about 450. So that's an increase of roughly a buck 50 per gallon.

[00:02:17]In other words, the Iran tax, a buck 50 per gallon, is much larger, about eight times larger than the federal gas tax, which politicians want to suspend.

[00:02:28]That's only 18.4 cents per gallon.

[00:02:33]That's the first key point. A gas tax holiday, it doesn't get to the heart of the issue. Because the heart of the issue isn't the 18.4 cents that the Washington tax man adds. It's the much bigger $150 that the Washington war has added. Here's a simpler way to think about it. Every time the president steps back from the war or deescalates, gas prices fall and they fall dramatically.

[00:03:00]So if you want the biggest, fastest, cheapest way to cut gas prices, don't fiddle with an 18.4 cent tax.

[00:03:09]Reopen the straight of a Muz. Calm markets instead of frightening them.

[00:03:14]Push for peace instead of beating our national chests. This gets to the heart of the issue. A gas tax holiday does not.

[00:03:24]Now I want to give you one extra bit of context. American gas taxes. And here I'm going to include not just the federal gas tax, but also our state gas taxes.

[00:03:34]Even when we combine them, they're extraordinarily low by rich country standards. In fact, no other OECD country has lower gas taxes than we do.

[00:03:44]In much of Europe, gas taxes are are several bucks per gallon, not cents.

[00:03:51]So, this isn't a story about Americans being crushed by some unusually heavy tax. If anything, we consume too much gas and we can and we tax it too lightly given the pollution and the congestion that driving causes.

[00:04:08]Look, that's not the main point here, but it's worth knowing because gas taxes are the problem.

[00:04:16]That is a very American piece of political folklore.

[00:04:22]Okay, now let's talk about the actual economics.

[00:04:26]If there's not enough fuel to go around, making gas cheaper is not a solution.

[00:04:33]Simple as that. Let me try and make the point with some analogies. If there's a water shortage, don't try and solve it by subsidizing showers.

[00:04:43]If there's a traffic jam, don't cut tolls. If there's a blackout, don't make air conditioners cheaper. And so, if there is an oil shortage, don't cut gas taxes. That's the whole idea. Look, it's it's common sense, but unfortunately, it's awfully uncommon right now. See, what this is is it's a supply shock. There's less oil reaching the world market. Uh, and so that leads gas prices to rise. Yes, it's painful.

[00:05:19]Yes, it's annoying. Yes, it's frustrating. But those higher prices, they're actually doing a job. They're telling us all that oil is scarce. That we need to cut back. And we need to cut back. So, we need an incentive to use a little bit less of that scarce thing.

[00:05:34]That incentive, that's what the high price of gas is. That in that high price gives you an incentive to combine errands, to delay a non-essential trip, to carpull, maybe to drive a little less. a gas tax holiday. It blunts that signal.

[00:05:49]Here's a key distinction. Helping households is not not the same thing as subsidizing gas consumption. If you send cash to a struggling household, you help them pay their bills. But if you cut the per gallon price of gas, you're also providing an incentive for them to buy more gas. One is relief, the other is a subsidy that encourages demand right when you don't need it. That's why this policy so back to front. The problem is that people want more gas than is currently available. And the brainiacs in Washington, their proposed solution make people want even more gas. Crock, it just doesn't make sense.

[00:06:29]It leans against the very mechanism, the price signal that helps an economy adjust when something becomes scarce.

[00:06:39]Okay. Now, let's talk about distribution. Basically, you want to ask who actually gets what from a gas tax holiday. Who would this help?

[00:06:48]It's going to come in two parts, but first I want you to imagine that you've got a fixed pot of money and you want to help those folks who are hurting right now. Well, thank you and I appreciate you. They appreciate you. Now, as you think about who you want to help and how much you want to help them, would you give more help to someone who's driving an inefficient SUV compared to someone who's driving an electric vehicle? Would he give more to the guy who's filling up a Silverado than to the nurse who carpulls? Would he give more to help a family with two cars than to a family that can afford only one? Of course not.

[00:07:21]But that's exactly what a gas tax holiday does. It doesn't target need. It targets gasoline purchases. So who gets the biggest subsidy? The people who buy the most gas. And richer households overwhelmingly buy more gas. They own more vehicles. They drive more miles. We have data from the Bureau of Labor Statistics from 2024 that shows that the poorest 1/5if of all Americans on average spend about 1,200 bucks a year on gas. The richest 1/5if spend about 3,500 bucks a year. That's roughly three times as much. So what that means is that a gas tax holiday ends up sending three times as much cash to the richest households as to the poorest households.

[00:08:10]Now I know that's not the whole story.

[00:08:12]Some lower income families really do depend heavily on a car and for them higher gas prices really buy it.

[00:08:19]Absolutely. But if that's your concern, that's a case for targeted aid. If you'd really genuinely want to help those in need through an energy shock, you'd help them based on their hardship, not based on gallons burned.

[00:08:34]Okay. The second part of who wins and who loses is where economics gets really useful. This is the difference between the impact of a tax and the incidence of attacks. Let me translate. I know not everyone speaks economics. The impact of attacks is who legally pays the tax. The incidence is actually who ends up bearing the cost after prices adjust.

[00:08:59]Impact gets the headlines. You have to pay extra for your gas. The impact is on you. Incidents is what actually matters for your life. Impact and incidents are different. Now, politicians, they often talk as though suspending the gas tax means drivers will get their gas for a full 18.4 cents less. That's impact thinking. It's very naive impact thinking. It's the way lawyers think.

[00:09:23]And I think part of the problem is so much of Congress are lawyers. If you want to know what's actually going to happen, lawyers reckon. They reckon you just read the law. But we economists, we know there's a higher set of laws at work here, the laws of supply and demand. So economists focus instead on incidents. incidents ask the smarter and more relevant question. What happens to the price that you'll actually pay once markets adjust, say to a gas tax or a gas tax holiday?

[00:09:53]And in this case, the logic's pretty straightforward. Suppose you cut the gas tax, as everyone in Washington seems to think is a good idea. Drivers are going to see a lower price. When they see a lower price of gas, they're going to want to drive a bit more, buy a bit more fuel. But the tax cut doesn't create any more oil. It doesn't reopen shipping lanes. It doesn't build refinery capacity. It doesn't cause tankers to suddenly materialize. So now you've got more demand chasing the same constrained supply. And what happens when more demand chases the same scarce product?

[00:10:26]The underlying market price rises.

[00:10:29]And so some of the tax cut is actually going to get bit away into higher gas prices. Those higher prices, they're going to end up helping suppliers and the suppliers of those suppliers. So that means part of your gas tax holiday will actually end up in the pockets of producers and refiners and wholesalers and retailers.

[00:10:50]There's a bitter irony in all of this.

[00:10:53]Oil companies are already having a magnificent time of all of this. Their product just became scarcer and more valuable because of trouble in the Middle East. On the flip side, families are hurting. Drivers are gritting their teeth at the pump. And the genius bipartisan answer is let's stimulate more demand for the oil company's scarce product.

[00:11:15]It's a way of helping oil companies raise their prices. And that is how some of that 18.4 cent tax cut will end up in their pockets instead of yours.

[00:11:26]So yeah, a policy marketed as relief for the little guy ends up helping the oil industry fatten its bottom line even further.

[00:11:36]It's not just bad optics, it's bad economics.

[00:11:41]Now, you might ask me at this point to be a little bit precise. For each dollar that we of tax cuts we offer, how much would end up in the pocket of drivers versus in the pocket of oil companies?

[00:11:52]And I'm going to be honest with you, it's actually a pretty tough question to answer. I I spent a couple of days digging through the research studies on this and you know, that's why I'm such good fun at dinner parties. I get to talk about that. Anyway, put that aside.

[00:12:07]Most of the the best evidence comes from when individual states have had individual state specific gas tax holidays. Now, here's the thing to remember about studies like that. A state gas tax holiday isn't exactly the same thing as a nationwide holiday in the middle of a wartime oil shortage.

[00:12:26]You see, at the state level, fuel can flow in from elsewhere in the country.

[00:12:31]So, supply is more flexible. At the national level, it can't. So these state level estimates are probably an upper bound on how much relief customers would actually get from a federal gas tax holiday. Okay. So what do we know? The folks at the Pen Wharton budget model, terrific set of nerds. They reckon that consumers get to keep about 72 cents of every dollar of a state specific gas tax holiday. The rest goes to the oil companies. They also say absolutely correctly that this is an upper bound on the effect of a national gas tax holiday. So that means the amount you get to keep is going to be less than 72 cents in the dollar. It's hard to be precise about this. So I'm just going to give you a back of the envelope guess. I reckon about half of of the money we spend on a gas tax holiday will end up in the pockets of consumers and maybe half will go upstream to oil companies and suppliers. I want to be clear, that's a guess. It's not a precise estimate, but we do know it's probably less than 72%.

[00:13:37]And so my 50/50 guess is a much more sensible benchmark than pretending that drivers are automatically going to pocket the full 18.4 cents of every 18.4 cent tax cut we offer during a gas tax holiday.

[00:13:55]Hey, if you've been around a while, some of this might actually sound kind of familiar. And that's because it is. We have done this exact silly dance before.

[00:14:08]Back during the 2008 presidential election, John McCain proposed a gas tax holiday. Hillary Clinton was in a primary against Barack Obama and she said, "Oh yeah, that's a terrific idea."

[00:14:19]Obama actually opposed it. Now, economists lined up against the idea. I wrote a really cranky piece that basically said not just that this is a bad idea, but that no one would be able to find a coherent economist willing to defend it. It's such a bad idea. Now, that piece actually got a fair bit of play. George Stephanopoulos actually posed that challenge directly to Hillary Clinton on TV, asking her to name one credible economist who supported her proposal, and she couldn't. In fact, she famously said, "I'm not going to put my lot in with economists." Sorry, Hillary, you should, mate. There was a PBS NewsHour producer who told one of their guests that they tried to get someone to support the gas tax holiday in order to show balance, but they literally couldn't find anyone willing to argue the other side of the case.

[00:15:12]So, I tell you all that so that you know I'm not giving you some fringe theory.

[00:15:18]Just about every economist sees the world this way. And if I sound a bit annoyed right now, honestly, it's because I am. We've seen this movie before. Same gimmick, same fake relief, same nonsensical politics, same refusal to ask whe the policy gets to the heart of the problems we actually face. Look, mate, apparently I've been complaining about gas tax holidays for 18 years.

[00:15:41]When I started, I thought this was a one-off, a strange blick, but bad policy that occurred during election season, and once it was exposed, it would quietly go away. I was young, I was optimistic, and I was wrong.

[00:15:56]So, here we are again. And I'm going to tell you, I'll probably be here again next time this comes up again, too.

[00:16:04]Look, let's try and figure out if there's a broader lesson here. One part of it might be that what matters when you think about taxes and subsidies is impact versus incidents. And I think that really matters a lot. Taxes and subsidies can be useful, but they don't always land where you want them to.

[00:16:22]again those pesky forces of supply and demand. The broader point still is I I want you to go away realizing you can't evaluate policy by vibes alone. You can't stop at, oh man, this sounds like it might help struggling families.

[00:16:37]You've got to ask the harder questions.

[00:16:39]What problem is it you're trying to solve? How markets will respond? Who will get the money? Who gets left out?

[00:16:46]And whether you're making the underlying problem better or worse. on each and every one of those scores, the gas tax holiday is a bad idea. But asking these questions and providing answers, that's what economics is for. It's not to drain the humanity out of policy. Quite the opposite. It's to make sure the humanity actually lands where it's needed. So yes, have a soft heart, but also have a hard head. Help people absolutely, but help them in ways that actually help.