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Impact on freight by the gas tax holiday

Fuel rates in the USA are standing stubborn at historically high rates in the summer of 2022. With the highest recorded average of diesel prices at $5.816 on the 19th of June, inflation has hit the economy hard. Freight movement is suffering consequent upon the truck drivers having a hard time filling up their gas tanks on a limited budget.

President Biden has announced a temporary "Gas Tax Holiday" to give a breather to the public in these financially tough times. In a speech from the White House, Biden said, "by suspending the 18-cent gas tax, federal gas tax for the next 90 days, we can bring down the price of gas and give families just a little bit of relief."
Experts have warned that this move could bring mixed results, if not entirely poor consequences.

What is a gas tax holiday?

A gas tax holiday is the suspension of general taxes that are applied to gasoline and diesel at the time of purchase, like a sales tax, thereby decreasing the price of fuel that the customers have to pay for a temporary period. A tax holiday can be announced by either the federal government for pan-country implementation or any of the state governments in their respective states.
The 90-day break from federal tax collection will wave off 24.4 cents per gallon of diesel and 18.4 cents per gallon of gasoline, sold through the month of September. With regards to freight logistics, it is expected to give commercial vehicle drivers a respite from the tantalizing inflation that has shaken up their budget.

While calling on Congress to enact the 3-month gas tax holiday, Biden blamed Russia's war on Ukraine as the cause of high prices and supply shortages. He also remarked that he understood that the fuel tax break is not sufficient to fix the problem at hand, but it will give families some immediate relief and a little bit of breathing room, while the government works to bring down the prices in the long haul.

The state governments have also been reached out and asked to consider lifting their own fuel taxes, to aid the consumers in creating some savings while retail inflation runs wild.

Is the immediate relief a befitting bargain for greater consequences?

Past efforts of the President to slash gas prices this summer ranged from the release of oil from the US Strategic Reserve to greater ethanol blending, but did little to bring in any visible results.

The new proposition is headed for the same fate, if the laws of economics hold true.
Firstly, the federal gas tax accounts as a major source of funding for Highways. The Highway Trust Fund would stand to lose $10 billion of resources that are required for the creation and maintenance of essential highway infrastructure and public transportation. The White House Fact Sheet states, "With our deficit already down by a historic $1.6 trillion this year, the President believes that we can afford to suspend the gas tax to help consumers while using other revenues to make the Highway Trust Fund whole for the roughly $10 billion cost." This is bound to lead to supply chain disruptions indirectly, with inadequate infrastructure hurting the logistics industry.

Secondly, the savings made on the suspension of federal fuel taxes are not estimated to be much or help the truck drivers in the long run. The move would lower diesel by 60 cents a gallon and gasoline by 50 cents, which is not an impressive amount. According to Economic Times, if savings from the 18.4 cents-a-gallon federal tax on gas are fully passed along to consumers, drivers would save about $2.76 for a 15-gallon fill-up. Tax holidays which were earlier imposed by some states are testament to the failure of such actions, because after the completion of the holidays, prices came back even higher. The economy needs demand destruction to curtail inflation, but a tax holiday would instead lead it towards demand creation. All that it would result in is a higher price when the holiday is over.

What does the Freight industry stand to gain or lose?

The trucking industry has shown immense criticism for Biden's suggested fuel tax holiday. The industry, which is one of the largest collective consumer of fuel, will get the temporary relief that the President has mentioned, but the period of ease will be shorter than he has assumed. It will not be long before prices of fuel, irrespective of taxes levied on it, soar to greater heights due to the demand that will be generated.

American Trucking Association's CEO and President Chris Spear has scoffed at the proposal and instead asked the government in Washington to implore long term solutions for curbing inflation and to get serious about lowering energy prices.
Spear remarked, "After months of touting the passage of the well-funded Infrastructure Investment and Jobs Act-a much-needed investment in our nation's roads and bridges-the Biden Administration wants to cut that same highway system's primary source of funding with a suspension of the federal fuel tax."

Back in March when some states announced the suspension of state fuel tax, the Owner-Operator Independent Drivers Association stated that these tax holidays would not do "anything for the trucking industry."

The impact of sky- high prices, if they keep going up, will hit the trucking industry harder than other sectors as it is already fragmented and chaotic due to lowering returns on investments and ever-increasing driver shortages. Freight logistics is destined to be impacted adversely because more than 72% of freight is transported through trucks. Supply chain disruptions are right on the tail of it.

Thus, the logistics industry stands to lose more than to gain. Any temporary savings will be offset by the consequences this holiday has in the future.

What does it actually mean for freight logistics?

Biden's Gas Tax Holiday appears to be nothing more than a politically oriented move in light of the upcoming November elections. Congress does not seem thrilled by the idea and thus, it holds very few odds in its favor to be an actual legislation.
Nevertheless, the subject of suspension of taxes on fuel for temporary gain brings light to the fact that the freight industry is completely misunderstood by the White House. Logistics have suffered over the years due to consecutive disruptions like the COVID-19 pandemic and now the Russia-Ukraine war, but any significant decision to pull the industry back up has not been made yet.
Energy demands are not going to lower, trucking will remain the pinnacle of on-road freight movement, and rocketing fuel prices will not just hurt the drivers but have a cascading effect on the entire supply chain system. An economic recession will definitely follow suit. Fluctuations in fuel prices are often at the core of a downward spiral.

How can the government actually help freight logistics?

Chris Spear of the American Trucking Association has suggested three immediate measures that can be more effective in controlling fuel prices than the tax holiday "gimmick":

  • Greater energy independence and lowering imports from Saudi Arabia.
  • Renewing trade agreements with the EU and Asian-Pacific nations for exporting more American oil and natural gas.
  • Balancing the budget with less revenue expenditure.

Corrective solutions that will sustain the supply chain and on-road freight movement are the pressing priority, the crucial necessity to control energy prices. Investments in infrastructure, state-of-the-art technology to advance logistics, and regulation of inflationary trends are what the government needs to consider. As Spears rightfully remarked, "Energy independence, trade and a balanced budget. Do that, and America wins."