President Biden has recently called on Congress to suspend the Federal Gas Tax of 18 cents until September. This move comes as the United States -- and many parts of the rest of the world -- have seen dramatic spikes in gas prices, driven in large part by energy shortages resulting from the war in Ukraine and subsequent Russian sanctions.

So is a suspension of the gas tax a good way to get relief to drivers? The stupid R1 is that the US gas tax is tiny; 18 cents is minuscule when gas is over $5 a gallon so this policy can't do much good or bad. But suppose the US had a meaningful gas tax, would suspending the tax to give drivers relief be sound economic policy? Absolutely not.

First, we have little reason the believe that a suspension of the gas tax would lead to meaningfully lower prices. This is because the statutory incidence of a tax cut is not necessarily the same as the economic incidence. In this case, just because you suspended a tax on gasoline at the pump, that doesn't mean that consumers will be the ones who benefit. Those eighteen cents of relief will be split between consumers and producers based on the relative elasticities of supply and demand. In the case of a tax cut, the more relatively inelastic supply is, the more producers will benefit, and the more relatively inelastic demand is the more producers will benefit. For traditionalists, here is a shitty MS Paint graph of what's going on. For others, the intuition here is that

1. In the short term, supply is constrained and demand for gas is relatively elastic
2. Because demand is somewhat elastic, a lowering of the gas tax causes people to want to consume more gas
3. But supply is constrained so this movement along the demand curve just leads to prices going up without much supply increase.
4. This means that it's likely that most of the benefit of a gas tax will be captured by producers and not consumers and we shouldn't see much of a price decrease.
5. Fun PS: if you think oil companies have substantial market power that has exacerbated gas price growth, why would you think they wouldn't also capture this tax cut?

Given this, we have little reason to believe that a suspension of a gas tax would lead to much relief for drivers. That alone makes this poor policy unless you really want to subsidize those poor oil companies. But this policy is also (mildly) inflationary in an environment where the Fed is already having to do substantial rate hikes in an effort to curb it.

In summary, subsidizing demand during a shortage is bad economics unless you have a really strong desire to give oil companies more money! If Biden wants to provide relief from high gas prices he should try to increase refinery capacity, reduce demand (maybe by subsidizing transit, particularly in dense cities with existing transit infrastructure), or if you had to give people money you should do it in lump sump payments not by subsidizing the exact thing that's currently experiencing a shortage!