The gasoline tax holiday being proposed is unlikely to provide any noticeable relief to high gasoline prices.
What would happen under such a model if gas taxes were cut? If you assume that gasoline is priced based on supply and demand, cutting gas taxes does nothing to address supply, and potentially increases demand. Thus, you could easily see gasoline prices quickly rebound back to where they are now following a gas tax cut. It’s just that the 18 cents that is currently captured by the federal government would just move elsewhere in the supply chain.
Consider that on June 1st, the state of New York suspended its motor fuel tax of 8 cents a gallon, as well as its 4 percent sales tax up to $2 a gallon. According to data from AAA, on June 1st the average retail price of gasoline in New York was $4.93 a gallon. Two weeks after the roughly 16 cent per gallon tax holiday went into effect, the average price in New York was $5.04 a gallon. .
If, instead of a gas rebate card, consumers simply received a rebate card they could spend anywhere, then that might have the intended effect. In this case, there is still an incentive to consume less , because gasoline prices remain high. But then money would be available for consumers to make up for the loss of discretionary income that is now going to pay for gasoline.
The other problem is that this would be akin to a stimulus payment, which we have seen multiple times over the past few years. Although these stimulus payments aren’t the primary driver of inflation right now, they certainly contribute. When people have more money to spend, they spend it. That helps drive inflation higher.
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