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Some economists say cutting gas taxes would have minimal benefits for consumers

LEILA FADEL, HOST:

President Biden wants Congress to cut taxes on gasoline for three months this summer. The White House says lowering prices at the pump by 18 cents a gallon on gas and 24 cents a gallon on diesel until the end of September is one way to help Americans burdened by inflation. It might also score political points for Biden, who is under pressure to do something about rising costs. But many economists say cutting taxes on gas would have minimal benefits for consumers and could even make inflation worse. Joining me to talk through this is economist Allison Schrager. She's a senior fellow at the Manhattan Institute. Welcome to the program.

ALLISON SCHRAGER: Hi. Thanks for having me.

FADEL: Thanks for being here. So the Biden administration's proposal to cut gasoline taxes for three months has landed with a thud on Capitol Hill. Why so much criticism of this plan from Republicans, yes, but also some Democrats?

SCHRAGER: Yeah. I mean, Republicans proposed something similar in 2008. And Democrats rightly pointed out then that when you cut the tax on gasoline - you know, there's something we call incidents in economics, which is, who benefits? Who gets that windfall?

FADEL: Yeah.

SCHRAGER: And when supply is constrained like it is right now, that mostly goes to producers and not the consumers. So this would really just be a windfall for the gas companies. And consumers wouldn't really even benefit.

FADEL: So an average driver wouldn't notice any relief?

SCHRAGER: No, maybe a little. I mean, it depends on how much the producers can increase supply, because if we cut the gas tax, then, you know, gas would get cheaper. But on the other hand, people would demand more. So that would just drive prices back up. Now, if producers could match that by increasing supply, then, you know, everyone would get some of this benefit. But, really, when supply is constrained, all the benefits just go to producers.

FADEL: How much are rising gas prices connected to inflation?

SCHRAGER: It's definitely a big part.

FADEL: OK.

SCHRAGER: I mean, I think it's wrong to say - some people say, it's all of inflation, and it's not. There's a lot going on. And everything's interconnected - right? - because, you know, higher gas prices make everything more expensive. Everything has to be transported. But there's also just higher inflation just because of rising labor costs, sort of still shortages from Chinese production. So everything's sort of tied up together, but it's definitely a big part of it.

FADEL: Is there anything the administration can do that it hasn't already done to lower gas prices?

SCHRAGER: Yeah. I mean, there are things they can do. I mean, there's regulations from the Bush era that require gas producers to mix fuel with renewables. And for smaller refineries, that's a very sort of expensive, cumbersome process, so they can't do it or they have to buy credits. And this really increases their costs. So sort of a pause in that regulation could help. That's controversial, right? The ethanol producers don't like that. I mean, the thing is, we all have to, as well, come to terms that a lot of these policies were put in place for a greener, more sustainable energy. And right now, a lot of those policies are at odds with high gas prices. So I mean, a lot of economists are saying, we really need to think more holistically about our energy policy and put us on a more sustainable path and something that's a little bit more sustainable - sorry, stable.

FADEL: Is there a way to incentivize U.S. oil and gas production to meet demand while still pursuing ambitious climate goals? Or are these two aims irreconcilable?

SCHRAGER: I don't know if they're totally irreconcilable. But, you know, they are in conflict. I mean, it's what - I mean, to sort of start drilling again, you know, a lot of - there was a lot of production in 2019. And some of it has fallen off because if you remember during the pandemic that oil prices actually went negative. So a lot of those refiners started losing money. And, you know, now prices are up. But, you know, there's a long lag time before starting to drill again. So they're like, well, prices are high now. But by the time I get this oil well going again, then prices could be down again. And I could be losing money.

And the fact that, as I said, this isn't any sort of party, there's been a big push to make oil companies pay higher rates of capital, partially because of our environmental goals. You're looking forward and you're like, yeah, prices are high now. But where are they going to be, especially if I have a higher cost of capital going forward?

FADEL: How much of the gas prices - I mean, it's about $5 on average right now, according to AAA. How much should we attribute these rising prices to Russia's invasion of Ukraine?

SCHRAGER: I mean, it's definitely a big part of it. I mean, we get less of our fuel from Russia. But prices are set in a global market. And certainly, in Europe, they're getting a lot of their fuel from Europe - sorry, from Russia. So it's definitely a big part of it. But, I mean, if you remember, oil prices were rising even before, largely because, as I said, we shut down a lot of production during the pandemic. And then it ramped back up...

FADEL: Yeah.

SCHRAGER: ...And demand went up very quickly. So it's definitely a big part of it, but it's not all.

FADEL: In the few seconds we have left - I mean, is it really in the control of the administration then if it's a part of these global factors as well?

SCHRAGER: No, not really. I don't think we can blame the Biden administration for oil prices being as high as they are now. But there's certainly things they can do to make oil prices more stable in the future.

FADEL: Allison Schrager is a senior fellow at the Manhattan Institute. Thank you so much for your time.

SCHRAGER: Thank you. Transcript provided by NPR, Copyright NPR.