Amid rising inflation and near-record high gasoline prices, President Biden has proposed that Congress pass legislation that would give drivers a temporary break at the pump by suspending the federal tax on gasoline for three months. How much would that help drivers? And what are the pros and cons of such a suspension?

Gas Prices are high everywhere:

A gallon of gas now costs an average of $4.97, according to the AAA, and even higher in some states, averaging more than $5.50 in Washington, Oregon and Nevada and a whopping $6.38 in California. The federal gas tax, which hasn’t been raised in almost 30 years, is roughly just 4.4% of the total price. Note: States also levy gas taxes, some of which are considerably higher than the federal tax amount. Biden’s “holiday” proposal would apply only to the federal tax.

President Biden’s Proposed Gas Tax Holidays: Will It Help or Hurt?

How the gas tax holiday would work:

It would temporarily suspend the 18.4-cent per gallon tax, assuming Congress grants the needed approval. Some lawmakers, along with some economists, are expressing misgivings. The Biden administration says the three-month holiday would cost about $10 million in money that would normally go to roads, bridges and other infrastructure but could be replaced from other revenues without affecting needed highway projects.

Sounds great, but wait.. What are the concerns?

Some economists worry that, over time, the tax holiday could boost demand and worsen the imbalance between supply and demand, which has caused the price escalation. They also say the savings would be puny by the time they reached consumers, amounting, for example, to a total savings of just $2.76 on a $75 fillup. Oil prices are not affected by price to consumers–demand is and encouraging people to spend more comfortably on gas could trigger more inflation in the long run. And that’s saying nothing about how bad gas consumption is for the environment.

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What has been the experience of states that have suspended their gas taxes?

So far, just four states have suspended their gas tax–Connecticut, Georgia, Maryland and New York. Recent research from Wharton found that when Connecticut, Georgia and Maryland suspended their state gas taxes earlier this year, motorists got between 58% and 87% of the savings. However, those “price reductions were often not sustained during the entire holiday,” the research found. After weeks of bickering, California’s governor and legislature agreed to give residents varying amounts of cash, based on income, instead of suspending the state’s gas tax.

What are the chances of a federal gas tax holiday winning Congressional approval?

Pretty slim, according to comments made by several key House and Senate members. Even a close Biden ally, Democratic Sen. Tom Carper of Delaware, called the proposal “shortsighted and inefficient.” But Biden may get political points for trying.

If no gas tax holiday, then what can consumers do to cut costs?

  • Find ways to drive less, including carpooling and consolidating errands into fewer trips. Do all you can to reduce gas consumption.
  • Put more money into that emergency fund to provide a cushion against rising prices.
  • Reduce, review, negotiate to lower the big and small expenses:
  • Streaming services, insurance premiums, cable bills, cell phone plans and gym memberships — especially now — are classic examples of recurring costs that are often negotiable, and so is the APR on your credit card.
  • Start spending less, but trying to invest more–for retirement, kids’ college education and other important long-term financial goals.
  • Diversify your investments to maintain your purchasing power in times of inflation; determine the best assets for your investments, considering your income, expenses, risk tolerance and time horizon.
  • Postpone buying the big stuff. Not everything will always be more expensive. Some price hikes could be temporary and it may pay to hold off.
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