RACHEL MARTIN, HOST:
U.S. consumers continue to feel the pinch of high inflation and high gas prices, which keep getting higher because of Russia's war in Ukraine. The national average, according to AAA, is over $4.30 a gallon. A growing number of states are considering a gas tax suspension to offer drivers some relief. Is that the best option, though? We're going to put that question to Carola Binder, an associate professor of economics at Haverford College in Pennsylvania. Welcome to the program.
CAROLA BINDER: Thanks for having me. I'm happy to be here.
MARTIN: So I don't have to tell you, whenever any of us goes to the gas station, I mean, it just boggles the mind. So, so this idea of a gas tax holiday - how would that work? And would it work to give consumers some relief?
BINDER: Well, there's two types of gas taxes that you pay. There's a federal gas tax and a state gas tax. And a gas tax holiday would either - would put a temporary pause to one or both of those. And, you know, at first, it sounds like a good idea because we really notice these high gas prices. And for a lot of households, they're really causing them a lot of pain. But ultimately, I don't think it's a good idea. The reason is that even though it's the low-income households who are feeling the pain of these high gas prices more, it's actually the high-income households who spend the most on gas. So they'd be getting the highest amount of relief from repealing or reducing this tax. So if we're - if what we're concerned about is low-income households who are really struggling to pay their bills now that gas tax - gas prices are so high, it would be much more effective to just send direct relief to a targeted set of households rather than reducing this gas tax for everyone. And also...
MARTIN: You're talking about, like, a direct stimulus payment to these households?
BINDER: Yes, but just to a limited set of households - right? - just to the lowest-income households who are really, you know, struggling to make ends meet now that gas prices are so high.
MARTIN: Doesn't - stimulus like that, though, adding more money into the economy - doesn't that risk raising inflation even more?
BINDER: Well, a gas tax would also risk raising inflation. And so I'm - what I'm saying is that for the same amount of stimulus you could add to the economy, you could either add it in a really targeted way so that a lot of it went to low-income households, or you could add it kind of spread around among all households. So the amount of revenue that states earn from - or that the federal governments earn from gas taxes, if they're not getting it from the gas tax anymore, they can't get it - they can't give it out in terms - in the form of stimulus, right? So we don't need some big aggregate stimulus right now. We don't need it in the form of lower gas taxes. We might just need a very targeted, more limited amount of stimulus just to low-income households.
MARTIN: I mean, it's interesting what you point out, right? States still have to pay their own bills.
BINDER: Right.
MARTIN: So if a gas tax is taken away, then presumably, costs end up being passed on to the consumer somewhere else.
BINDER: Right. I mean, they still need to pay their bills. If there were just a reduction in the gas tax and no other taxes added, that would be a boost to aggregate demand. And inflation is already really high right now, so the Fed would just have to offset it with with further rate hikes down the road.
MARTIN: You mentioned at the top, I mean, there's two options here - federal gas tax cut or a state gas tax reprieve. Would there be a different benefit if one happened and not the other?
BINDER: Well, the federal gas tax is a little smaller than most of the state gas taxes. And so I don't think there would be a really huge difference, just the maximum that gas prices could be reduced from a federal gas tax cut would be about 18 cents per gallon. In some states, it could be a little more than that.
MARTIN: But that's still not - wouldn't make a huge difference.
BINDER: Still not - right.
MARTIN: Lastly, some Democrats are proposing a tax on oil companies that are making big money at this moment. This is a so-called windfall tax. Is that a good idea?
BINDER: Honestly, I think that's an even worse idea. That's the so-called windfall profits tax. Well, one reason is that it's not very likely to actually reduce the prices that consumers pay at the pump. And even worse, it's likely to reduce the domestic supply of oil, right? If these oil companies are subject to another tax, that's another cost for them. So that's going to be likely to reduce domestic supply of oil, so it could actually even backfire and raise the prices that consumers pay. So I think that's a very bad idea.
MARTIN: Carola Binder, an associate professor of economics at Haverford College, thank you so much.
BINDER: Sure. Thanks for having me. Transcript provided by NPR, Copyright NPR.
