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Will Biden’s Proposed Gas Tax Holiday Help Retail?

Will a three-month federal gas tax holiday help retail?

President Biden on Wednesday called on Congress to suspend the federal gas tax for the next 90 days, and urged states to suspend their own surcharges on gas to relieve summer travelers.

With the federal tax at 18.4 cents per gallon of gas and 24.4 cents for diesel, a vehicle getting 20 miles per gallon at 500 miles per month would save $4.60 or $6.10, respectively. State taxes average 30 cents to 35 cents, according to IGEN, which tracks these surcharges by state. California tacks on an additional 51 cents for gas and 38 cents for diesel, while Indiana levnies 32 cents for gas and 53 cents for diesel. Pennsylvania’s fees come in at 58 cents for gas and 74 cents for diesel.

Ryan Sweet, senior director of the economics team at Moody’s Analytics, noted earlier this month that every penny change in retail gas prices “adds or subtracts $1.28 billion in consumer spending” over a year. Gas prices reaching $6 or $7 a gallon could chill consumer spending, especially for households with income below $55,000, he pointed out.

Meanwhile, consumer sentiment appears to be on the decline, indicating that retail sales will have a tougher road ahead for the rest of the year. The University of Michigan Index of Consumer Sentiment for June tumbled to 50.2 from 58.4 last month, reflecting a drop from 85.5 a year ago and the lowest reading since data collection began in 1978. Results of the more widely tracked Consumer Confidence Index from The Conference Board for June are due Tuesday.

The White House on Wednesday said that President Biden “understands that a gas tax holiday alone will not, on its own, relieve the run up in costs that we’ve seen.”

The annual inflation rate in the U.S. climbed to 8.6 percent in May, the highest reading since December 1981.

Inflation is already impacting consumer spending when people are starting to spend on services and experiences again instead of on goods. Retailers such as Walmart and Target are in the process of discounting goods that consumers largely passed over.

Fitch, the credit ratings firm, “expects a heightened promotional environment through the summer as retailers clear excess goods,” said David Silverman, senior director for the New York firm.

But even discounts might not be enough to help consumers suddenly paying more just to put food on the table. Suspending the federal gas tax isn’t likely to encourage consumers to switch their spending back to products like clothing.