Penn Wharton Budget Model releases new report examining effects of federal gas tax holiday

As gas prices rise nationally, the Penn Wharton Budget Model has released a new report examining the effects of a federal gas tax holiday on average American consumers and the United States government. 

Gas prices have risen to historical levels during the past month, largely due to the Russia-Ukraine war. According to The Philadelphia Inquirer, the average gas price in Philadelphia rose by more than 50 cents in the past week alone to $4.30 a gallon — the highest on record. In response to rising gas prices, a group of senators introduced a bill to Congress that would suspend the federal tax on gasoline until December.

The latest Penn Wharton Budget Model report examined the effects of this proposed gas tax holiday on both consumer expenditure and government tax revenue. It ultimately found that while consumer expenditure on gasoline would fall, the federal government’s tax revenue would decline by $20 billion.

“We are in unprecedented times where the debt is larger than the economy. And there’s no forecast of it coming down, which will impact all our futures,” said Wharton professor Kent Smetters, faculty director of the Penn Wharton Budget Model. 

The Penn Wharton Budget Model, founded five years ago, aims to use analytical methods and modeling to examine the tradeoffs of different policies, such as President Joe Biden’s budget reconciliation bill. 

“We typically work on the front end with policymakers, and provide much deeper modeling of the economic impact of policies,” Smetters said. 

Their website contains data on a variety of economic issues, available to Penn students and the larger community. 

“Our aim is to use analytics not just for driving profits, but for the greater good of the world around us,” Smetters said.

Since 1993, the federal gasoline tax has remained constant at 18.4 cents per gallon, accounting for about 4.61% of the gasoline prices that consumers pay, according to the report. Currently, consumers bear an estimated 80% of the tax burden. 

If the federal tax was suspended, 80% of the tax decrease — 14.72 cents per gallon — would impact consumers. The same gallon of gasoline would cost less, potentially encouraging higher consumption, the report found. Due to the increase in consumption, state tax revenue could increase by between $100 million and $300 million — however, the federal government’s tax revenue would fall. 

On the other hand, the report found that since Americans are unlikely to change their gasoline consumption patterns in the short run, the consumer impacts would be relatively small. The suspension of the tax until December 2022 would only result in an increase in consumption of between 0.9 and 2.7 gallons, and a decrease in gasoline expenditure per capita of between $16 and $47.

The impacts of the proposed tax, the report found, would vary dramatically across the nation. States where driving is the primary mode of transportation would experience the largest increase in consumption. Other states, like Pennsylvania, do not have a state gasoline tax, limiting the effects of a tax holiday for the state government.