The Utter Futility of a Gas Tax “Holiday”

Disclaimer: The House and Senate, in the grand scheme of things, have plenty of time to hack together a short-term extension of transportation funding, or even to pass the Senate bill outright if they felt like it.

If Congress can't pass an extension, it's going to cause chaos, not a drop in gas prices. Photo: Tomas Carrillo/Flickr

Sometimes, though, to the outside observer (even to the cross-eyed reporter) it sure does look like we could be headed for a shutdown of federal transportation programs, starting a half hour into this week’s rerun of Saturday Night Live.

A shutdown would mean the feds won’t be able to cut checks to states, cities, or other agencies working on federally-funded projects. Construction on those projects would stop. Some projects might even be canceled outright.

Accounts payable aren’t the only function that will expire at 12:01 on Sunday morning — accounts receivable will too. The federal gas tax, the primary revenue stream for the primary source of funds for all national transportation projects, is only authorized to exist through the end of Saturday. (That transportation policy and gas taxes expire on the same day started as a coincidence, but they’ve been tied together since September 30, 2011.)

Some politicos on the fringes seem to think this is kind of a good idea. Senator Jim DeMint, a Tea Party favorite, recently floated an amendment that would have rolled back the gas tax and drastically shrunk federal transportation programs. Pollsters are playing into the whole fantasy: A recent Rasmussen poll found that 48 percent of Americans would favor a temporary elimination of federal gas taxes “until prices come down.”

Set aside, for the moment, that failing to collect the gas tax would make it harder for the U.S. to make necessary adjustments (more transit, anyone?) in the face of growing worldwide demand for oil. Letting the gas tax expire probably won’t even give Americans a temporary reprieve. Here’s why.

As it turns out, the whole 18.4 cents per gallon tax isn’t slated to expire, just most of it — 14 cents per gallon, to be exact. A permanent 4.3 cent per gallon tax would stick around. Taxes on diesel and kerosene would also fall to 4.3 cents per gallon.

So would gas everywhere be 14 cents cheaper by the gallon starting Sunday morning? Not right away, and possibly not ever.

To understand what would happen if the gas tax went away in the middle of the night, it helps to understand how the government collects taxes on gas. It is not a magic transfer at the pump. The tax is actually paid at bulk distribution terminals when purchased by retailers, and reported quarterly to the IRS. The gas people buy at the gas station has already been taxed, with the extra cost to the retailer passed on to consumers.

The motor fuel supply chain. Gas taxes are assessed at the narrowest point in the process, the distribution terminal. Image: U.S. E.I.A.

That means that a gas station sitting on top of a full tank of gas wouldn’t really be able to lower their prices right away, because they need to recoup the taxes they already paid. The price drop, such as it is, would come when they need to refill — but only if the distributors drop their rates. Here’s where it gets tricky.

“The question for people downstream [i.e. distributors and retailers] would be whether they believe the tax will stay off, or whether, when they re-impose the tax, it would be made retroactive,” said Stephen Comstock, manager of tax policy at the American Petroleum Institute.

Imagine, Comstock posits, “you’ve sold the stuff without a tax because the tax doesn’t apply.” Then, when the tax is reinstated, “all of a sudden the position holder would go back to their customer and charge the customer” for the taxes that weren’t collected during the shutdown. Who is responsible for covering those costs? The distributor? The retailer? Who would be willing to drop their prices if they think they’ll be on the hook for back taxes later?

The closest comparison available is the two-week FAA shutdown from last summer. Only three airlines allowed their fares to drop when FAA taxing authority expired, while the rest raised fares by a corresponding amount to make up the difference. The IRS never collected taxes owed by airlines during the shutdown, though some reimbursements were made available to passengers who bought tickets during that period. The equivalent today would be distributors keeping prices where they are and simply collecting more from each transaction. (Here’s a fascinating IRS website explaining the implications of the FAA shutdown.)

In other words: A gas tax “holiday” isn’t going to bring down prices at the pump.