President Proposes Temporary Suspension of Federal Gas Tax

Action: The President proposed suspending the Federal gas tax “for a period of time” in response to rising gas prices associated with the Iran war.¹

Trusted Insights for What’s Ahead^®

• The Federal government charges an 18.4 cent per gallon excise tax on gasoline and a 24.4 cent per gallon excise tax on diesel.² The tax is collected at the wholesaler or distributor level and then passed on to consumers buying gasoline or diesel.
• The excise tax revenues go to the Highway Trust Fund, the Federal government uses for construction of the interstate highway system and other national highways and for constructing, maintaining, and repairing other forms of mass transit.³ The Federal government collected $25.2 billion in gasoline taxes and $10 billion in diesel taxes in fiscal year 2024.⁴
• Suspending the tax requires an act of Congress. A bill will soon be introduced in each chamber to suspend the tax.⁵
• Republicans in Congress seem open to the idea of a temporary suspension of the Federal gas tax, though leadership remains hesitant of unintended consequences.⁶ These include the existing financial imbalance in the Highway Trust Fund and the deficit impact of using general revenues to backfill the Highway Trust Fund as in the proposed bill.
• The Biden Administration floated a gas tax holiday when gas prices hit their previous highs in 2022.⁷ Nevertheless, Democrats may be hesitant to support the proposal because it may not make a meaningful impact for consumers at the cost of further depleting the Highway Trust Fund.
• States also tax gasoline. Several states, such as Indiana and Georgia, have suspended their state-level gas taxes, while Kentucky and Utah have reduced theirs to alleviate cost concerns tied to the Iran war.⁸
• What this means for business: A temporary suspension of the Federal gas tax would likely lower topline gasoline prices for businesses and consumers, though because the tax is collected at the wholesale level, the full effect of the policy would depend on the effects of suspension on the retail price of gasoline—lower topline prices could stimulate demand, thus also putting some upward pressure on price.
  • Depending on the timing of and conditions for ending the suspension, the policy may also boost consumer spending and travel in the summer, particularly if the Iran war moves to a conclusion and energy markets begin to stabilize.
  • In the medium-term, suspending the Federal gas tax would reduce revenues to the Highway Trust Fund, which already faces a projected funding shortfall starting in 2028.⁹ As a result, implementing this policy would negatively affect Federal financing of highway and mass transit projects over the next several years.