The Disparate State Impacts and Enormous Cost of a Gas Tax Holiday

Legislative interest in suspending the federal gas tax in response to high fuel prices gained support recently when President Trump told a reporter, “I think it’s a great idea. Yup, we’re going to take off the gas tax for a period of time, and when gas goes down, we’ll let it phase back in.” Last month, Senator Josh Hawley (R-MO) introduced legislation to suspend the 18.4 cents per gallon federal gasoline tax and the 24.4 cents per gallon diesel tax for 90 days with an option to extend the tax holiday for an additional 90 days if the President deems it appropriate. In March, Senators Mark Kelly (D-AZ) and Richard Blumenthal (D-CT) introduced a gas tax holiday through September. Other lawmakers, on a bipartisan basis, have also introduced similar bills in the past. However, as researchers have noted , there are significant concerns with this policy, including the possibility that the tax cut won’t be passed forward to consumers, the potential negative impact on the federal Highway Trust Fund, and the overall fiscal impact . As I demonstrate here, this policy offers only partial and disparate relief at a significant fiscal cost. Drivers Are Paying More to Fill the Tank The price of a barrel of crude oil jumped from nearly $65 in February to more than $110 in April and is now a bit below $100. The spike is attributable to the closure and blockade of the Strait of Hormuz, through which 25 percent of seaborn oil trade passes annually. Nationally, regular gasoline prices increased more than $1.50/gallon from the end of February through May and are now only modestly below recent highs. On average, drivers have paid $43.57 per month more in March, April, and May on gasoline than they did during these same months in 2025. However, the impact varies by state depending on miles driven, fuel efficiency, and the change in local fuel prices. In Alabama, Mississippi, and Kentucky, average drivers are paying $58.74 per month extra for gasoline. Meanwhile, drivers in Minnesota and Nebraska are paying “just” $30.29 more per month, on average. A Gas Tax Holiday Offers Minimal, Poorly Targeted Relief From the consumer perspective, in the best-case scenario of a federal gas tax holiday, the price of gas would fall immediately by the amount of the tax break. However, in Alabama, Mississippi, and Kentucky, the states where drivers face the largest burden from higher prices, a gas tax holiday would save drivers $9-$11 per month, offsetting, at most, 20 percent of the additional monthly cost for gasoline. In Minnesota, California, and Hawaii, the tax holiday would save an average driver $6-$7 per month. At most, drivers in North Dakota, Nebraska, and Kansas could have more than 25 percent of the additional cost offset, while drivers in Arizona and Alaska would see only 15 percent of their additional cost offset. The map below shows where the rise in gas prices has hit drivers the hardest. Hover over each state to see the average price increase since February, the average benefit from suspending the federal gas tax, and the share of the price surge that would (at most) be offset. Results reported here provide an upper-bound estimate of the potential benefit from a gas tax holiday on consumers. However, assuming an immediate and full pass-through of the tax holiday to lower gas prices is optimistic. Tsvetanov (2024) recently estimated that only 79 percent of a gas tax holiday is likely to pass through to lower prices for consumers.  Moreover, given recent evidence about the likely short-run elasticity of demand for gasoline, higher than previously thought, consumption may be down as much as 10 percent compared to last year if prices remain high. Importantly, while the consumer benefit may be quite limited in general and vary notably by state, the fiscal impact will be considerable. I estimate that a three-month gas tax holiday as proposed by Senator Hawley and beginning in July would reduce the Highway Trust Fund by $9 billion. The net budgetary impact would be $6.6 billion after accounting for the standard income- and payroll-tax offset used by federal scorekeepers. If the tax holiday were extended an additional three months, through December, the net cost would be $12.9 billion, slightly less than double given that miles driven decline in the fall relative to the summer. On net, a gas tax holiday would have a limited and disparate impact on drivers while increasing the federal deficit by billions of dollars per month. It would provide only partial relief from higher fuel prices, do little to address the underlying cause of those prices, and weaken the Highway Trust Fund at a time when federal transportation finances are already strained. The post The Disparate State Impacts and Enormous Cost of a Gas Tax Holiday appeared first on American Enterprise Institute - AEI .