Executive Summary

• Rising gas prices due to the ongoing conflict in the Middle East have prompted calls for a federal gas tax holiday; President Trump has expressed support for suspending the gas tax temporarily and both Republicans and Democrats in Congress have introduced legislation to do so.
• Any gas tax holiday would impose costs on the federal budget; a one-month suspension would cost $3.4 billion, a three-month suspension $10.3 billion, and a full-year suspension $41.0 billion.
• Depending on the length, a gas tax holiday could push insolvency of the Highway Trust Fund up by several weeks to 18 months.
• The consumer benefits of a gas tax suspension would be immediate, but modest; for example, a household that uses 50 gallons of gasoline per month would save $9.20 from a one-month suspension, $27.60 from a three-month suspension, and $110.40 from a full-year suspension.
• A federal gas tax holiday could create broader economic distortions, including undermining economic incentives for fuel efficiency and energy conservation; moreover, a gas tax holiday is an ineffective anti-inflation strategy, since fuel prices are primarily driven by crude oil markets, geopolitical conditions, and refining capacity constraints rather than federal tax levels.

Introduction

Rising gas prices due to the ongoing conflict in the Middle East have prompted calls for a federal gas tax holiday. As of May 18, the average gas price is $4.62 per gallon – a $1.55 (50-percent increase) from February 23. President Trump has expressed support for suspending the gas tax temporarily and both Republicans and Democrats in Congress have introduced legislation to do so.

Any gas tax holiday would impose costs on the federal budget. A one-month suspension would cost $3.4 billion, a three-month suspension $10.3 billion, and a full-year suspension $41.0 billion. Depending on the length, a gas tax holiday could push the projected insolvency of the Highway Trust Fund (HTF) up by several weeks to 18 months.

For consumers, the benefits of a gas tax suspension would be immediate, but modest. A household that uses 50 gallons of gasoline per month would save $9.20 from a one-month suspension, $27.60 from a three-month suspension, and $110.40 from a full-year suspension.

Additionally, a federal gas tax holiday could create broader economic distortions, including undermining economic incentives for fuel efficiency and energy conservation. Moreover, a gas tax holiday is an ineffective anti-inflation strategy, since fuel prices are primarily driven by crude oil markets, geopolitical conditions, and refining capacity constraints rather than federal tax levels.

This insight examines the costs of a federal gas tax holiday.

The Mechanics of the Gas Tax

The federal government imposes excise taxes on gasoline and diesel fuel to finance transportation spending. The taxes are charged per gallon of fuel sold, rather than as a percentage of the purchase price of a gallon of fuel. The federal gas tax is currently 18.4 cents-per-gallon for gasoline and gasohol and 24.4 cents-per-gallon for diesel fuel. 18.3 cents of the gas tax and 24.3 cents of the diesel tax are deposited into the Highway Trust Fund (HTF) and the remaining 0.1 cent from each tax goes to the Leaking Underground Storage Tank Trust Fund. The federal gas and diesel tax rates have remained unchanged since 1993, even though inflation and improvements in vehicle fuel efficiency have reduced the purchasing power of the revenue collected from the taxes.

States impose additional excise taxes on gasoline and diesel fuel. The rates vary across states.  California imposes the nation’s highest gas tax rate of 70.9 cents-per-gallon, while Alaska imposes the lowest rate of 9 cents-per-gallon. Diesel tax rates are a bit higher, with California imposing the highest diesel tax of 87.3 cents-per-gallon and Alaska imposing the lowest of 9 cents-per-gallon.

A small number of states have suspended or reduced their gas and diesel taxes in response to higher fuel prices due to the ongoing conflict in the Middle East. In March, Georgia Governor Brian Kemp signed legislation into law that suspended the state’s 33.3 cents-per-gallon gas tax and 37.3 cents-per-gallon diesel tax through May 19. Governor Kemp has signed an executive order to continue the state’s gas tax holiday through June 3. In April, Indiana Governor Mike Braun signed an executive order that suspended the state’s 7 percent usage tax on fuel for 30 days. Governor Braun has signed another executive order that extends the suspension of Indiana’s usage tax on fuel for another 30 days and includes a suspension of the state’s 36 cents-per-gallon gas tax. In Kentucky, Governor Andy Beshear authorized a 10-cent reduction in the state’s 26.4 cents-per-gallon gas tax and froze a scheduled rate increase to 27 cents-per-gallon that was to take effect in July. Eight other states have debated or introduced proposals for some form of a gas tax holiday but have not yet enacted any policy change.

The actions at the state level have prompted federal lawmakers to advocate for a federal gas tax holiday.

Growing Momentum for a Federal Gas Tax Holiday

President Trump has expressed support for a gas tax holiday, saying “…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.” Congress will need to pass legislation to suspend the gas tax; the president can’t do it through executive order. Both Republican and Democratic lawmakers have introduced legislation to suspend the federal gas tax. Senator Josh Hawley (R-MO) introduced the Gas Tax Suspension Act, which would suspend the 18.4 cents-per-gallon gas tax and 24.4 cents-per-gallon diesel tax for 90 days after enactment. The bill would give the president the authority to extend the suspension for another 90 days if he determines that economic conditions merit an extension. In March, Senators Richard Blumenthal (D-CT) and Mark Kelly (D-AZ) introduced the Gas Prices Relief Act of 2026, which would suspend the 18.4 cents-per-gallon gas tax through October 1, 2026. The bill would require the Treasury Department to transfer funds from the general fund to the HTF and the Leaking Underground Storage Tank Trust Fund in amounts equal to the lost revenue from the suspension. Representative Chris Pappas (D-NH) introduced a companion bill in the House. Representatives Josh Harber (D-CA) and Kim Schrier (D-WA) introduced a similar bill in April that would suspend the gas tax for a longer period, through January 1, 2027.

The Budgetary Impact of a Gas Tax Holiday

The impact of a gas tax holiday on the federal budget would vary depending on the duration of the policy. Even a relatively short suspension would impose costs on the federal budget and the HTF. The most direct cost would be the immediate reduction in federal revenues. The federal gas and diesel taxes currently generate about $38 billion in federal revenue annually, which is deposited into the HTF to finance transportation spending. Suspending the gas tax, even temporarily, would eliminate billions of dollars in federal receipts at a time when the federal government is running massive budget deficits.

Without accounting for behavioral effects, a one-month suspension of the federal gas tax beginning June 1 would reduce federal revenues by $2.4 billion. A three-month suspension would reduce receipts by $7.3 billion, and a four-month suspension would reduce revenues by $9.7 billion. A prolonged gas tax holiday would generate greater revenue losses. A six-month suspension would reduce federal revenues by $14.5 billion and a full-year suspension would reduce receipts by $29.0 billion.

Budgetary Impact of Various Gas Tax Holiday Scenarios

	1-Month Suspension	3-Month Suspension	4-Month Suspension	6-Month Suspension	12-Month Suspension
Lost Gas Tax Revenue	-$2.3 billion	-$7.0 billion	-$9.4 billion	-$14.1 billion	-$28.2 billion
Lost Diesel Tax Revenue	-$0.9 billion	-$2.6 billion	-$3.5 billion	-$5.2 billion	-$10.5 billion
Income Tax and Payroll Tax Offset*	$0.8 billion	$2.4 billion	$3.2 billion	$4.8 billion	$9.7 billion
Total Lost Revenue	-$2.4 billion	-$7.3 billion	-$9.7 billion	-$14.5 billion	-$29.0 billion
Increase in Interest Payments	-$1.0 billion	-$3.0 billion	-$4.0 billion	-$6.0 billion	-$12.0 billion
Total Budgetary Impact	-$3.4 billion	-$10.3 billion	-$13.7 billion	-$20.5 billion	-$41.0 billion

Sources: Congressional Budget Office, Joint Committee on Taxation (JCT), and author’s calculations. Numbers may not sum due to rounding. *JCT estimates that any excise tax reduction would have a corresponding 25-percent offset due to an increase in income and payroll tax revenue.

Because federal transportation spending would continue despite the suspension, the lost HTF revenue would likely be replaced through a general revenue transfer (as some legislation specifically requires). In practical terms, this means financing transportation spending through deficit financing, which would increase the federal government’s net interest payments on its $39.1 trillion debt.

After including the impact on interest payments, a one-month gas tax holiday would cost $3.4 billion, a three-month suspension would cost $10.3 billion, and a four-month suspension would cost $13.7 billion. A six-month suspension would cost $20.5 billion and a full-year suspension would cost $41.0 billion.

The Impact of a Federal Gas Tax Holiday on the Highway Trust Fund

The HTF is the primary mechanism for financing most federal spending on highways and mass transit. The trust fund was designed around a user-pay principle; that is, consumers who buy fuel for their vehicles or utilize the mass transit system contribute directly to the fund’s maintenance through federal fuel taxes. Receipts from federal gas and diesel taxes currently comprise 82 percent of the HTF’s revenue stream.

The financial condition of the HTF has steadily declined over the past several decades. The HTF has run an annual deficit since fiscal year (FY) 2006 and the Congressional Budget Office estimates it will be insolvent by the end of FY 2028. Any gas tax holiday would accelerate the depletion of the HTF.

A one-month suspension would accelerate depletion by several weeks to two months. A three-month holiday would push insolvency up by three to six months, while a four-month suspension would move depletion up by five to eight months. A six-month holiday would push HTF insolvency up by eight months to a year and a full-year suspension would push depletion up by a year to 18 months. Of course, these are just estimates and the actual impact of any gas tax holiday on HTF insolvency will depend on monthly outlay schedules, demand for fuel, and whether Congress decides to transfer more general revenue into the trust fund.

The Impact of a Federal Gas Tax Holiday on Consumers

A federal gas tax holiday would provide consumers with immediate, but modest, relief from high gas prices. In theory, the full benefit of the suspension would be passed on to consumers in the form of lower gas prices, thus reducing household transportation expenditures and slightly easing inflationary pressures. Households with long commutes or high gas consumption, particularly in rural and suburban areas, could see meaningful savings. Businesses’ transportation and shipping costs could decrease, potentially moderating price increases for consumer goods and services.

To illustrate the potential savings, let’s assume a household uses 50 gallons of gasoline per month. A one-month suspension of the 18.4 cents-per-gallon federal gas tax would generate $9.20 of savings, a three-month suspension $27.60 of savings, and a four-month suspension $36.80 of savings. A longer gas tax holiday of six months or one year would yield $55.20 and $110.40 of savings, respectively. A household that uses 50 gallons of diesel per month would enjoy slightly greater savings since the federal diesel tax rate is six cents-per-gallon higher.

In practicality, however, the overall benefit to consumers would likely be limited by structural factors within energy markets. Gas prices are primarily driven by global crude oil prices, refining capacity, and regional supply constraints. That means fluctuations in oil markets can easily outweigh the savings a gas tax holiday would generate. Moreover, the full benefit of tax reductions is not always passed on to consumers; refiners, wholesalers, and retailers may retain a portion of the benefit, particularly during periods of strong demand or constrained supply.

Furthermore, the distributional effects of a gas tax holiday would be uneven across income groups and geographic regions. Households that drive more frequently or own less fuel-efficient vehicles would realize larger absolute savings, while households that rely primarily on public transportation or do not own vehicles would receive little direct benefit. Because higher-income households generally consume more gasoline than lower-income households, a federal gas tax holiday may disproportionately benefit middle- and higher-income consumers in dollar terms. This led to the view that a gas tax holiday is a relatively inefficient mechanism for broad-based economic relief compared to more targeted measures such as direct rebates, expanded tax credits, or public transit subsidies.

Additionally, a prolonged gas tax holiday that doesn’t replace lost HTF revenue through a general revenue transfer or other means could weaken the long-term sustainability of federal transportation spending. Deferred infrastructure maintenance may impose indirect costs on consumers through increased vehicle repair expenses, traffic congestion, and reduced transportation efficiency.

The Impact of a Federal Gas Tax Holiday on the Economy

A federal gas tax holiday could create broader economic distortions. By artificially lowering fuel prices, for example, the policy could encourage increased gasoline consumption. Higher demand for fuel could place additional pressure on already constrained energy markets.

It could also undermine economic incentives for fuel efficiency and energy conservation. Consumers are unlikely to reduce discretionary driving, purchase more fuel-efficient vehicles, or shift to alternative modes of transportation when gas prices are artificially reduced. This could weaken market signals that would otherwise encourage long-term energy conservation and efficiency improvements.

Additionally, a gas tax holiday could worsen traffic congestion and increase negative externalities such as road wear, air pollution, and greenhouse gas emissions. These externalities carry measurable economic costs through health care expenditures, environmental damage, lost productivity, and infrastructure deterioration.

From a macroeconomic perspective, a gas tax holiday is also an ineffective anti-inflation strategy. Gasoline prices are primarily driven by crude oil markets, geopolitical conditions, and refining capacity constraints rather than federal taxation levels. While suspending the gas tax may temporarily reduce headline inflation statistics, the effect is generally small and short-lived. The policy doesn’t address the underlying causes of inflation and may even modestly increase aggregate demand at a time when policymakers are attempting to stabilize prices.

Conclusion

While a federal gas tax holiday would offer immediate, if minimal, consumer relief at the pump, its fiscal and economic costs outweigh its temporary benefits. Any gas tax suspension would weaken federal transportation financing, placing additional strain on the already shaky HTF. Consumers would receive limited and uneven savings, with higher-income households receiving a disproportionate share of the benefits. The policy would create broader economic inefficiencies by encouraging greater fuel consumption, distorting energy markets, and undermining environmental and transportation policy objectives. Because gasoline prices are largely driven by global energy markets, suspending the federal gas tax does little to address the underlying causes of inflation or high fuel prices.

Ultimately, a federal gas tax holiday represents a politically appealing but economically inefficient policy response. Policymakers seeking to provide meaningful relief to households would be better served by targeted assistance measures that preserve infrastructure funding, maintain fiscal responsibility, and support long-term economic and energy stability.