The Distributional Effects of a Federal Gas Tax Holiday

Policymakers have proposed a temporary federal gas tax holiday as a way to offset the rise in gasoline prices caused by the war with Iran. As of early June 2026, Ryan Cummings and coauthors estimated that the average household will lose roughly $1000 in 2026 due to war-induced gas price hikes, with disproportionate burden on lower- and middle-income families.1

The idea of a gas tax holiday is familiar: John McCain and Hillary Clinton both proposed versions during the 2008 presidential campaign, and President Biden made a similar proposal in June 2022. However, a gas tax holiday has never been enacted at the federal level. 

This analysis examines who would benefit from a three-month federal gas tax holiday, and by how much, relative to current law. First, we look at how much of the tax cut would actually reach consumers rather than being captured by producers; that is, what is the economic incidence of a gas tax holiday? Second, how are the benefits distributed: are heavy gas users typically rich, typically poor, or spread across the income spectrum? 

Our reading of the limited available evidence is that consumers would likely receive most of the benefit of a three-month gas tax holiday. Higher-income households would receive more tax relief in dollar terms and lower-income households would receive more as a share of income. However, the spread of benefits within income groups is larger than the average difference across groups. The heaviest drivers gain the most, while many households that drive little (whether low- or high-income) gain almost nothing.

A gas tax holiday removes the 18.4-cent-per-gallon federal tax, but households do not directly pay that tax, and they benefit only to the extent that prices fall at the pump. As with all tax changes, the benefits of a federal gas tax holiday will be split between the producers (oil companies, refineries, and service stations in this instance) and consumers.

A general principle of tax analysis is that the less elastic side of a market—the side least sensitive to price—gains more from a tax cut. If in the short-run it is sufficiently difficult for suppliers to adjust how much gasoline they deliver to U.S. consumers, producers and retailers can retain part or even all of the benefits from the gas tax holiday. 

Both producers and consumers can respond to a tax change, but their options for doing so are limited over a three-month holiday. On the demand side, gasoline consumption depends most directly on miles driven, which many households cannot easily adjust in the short run. Other means of adjustment, like buying a more or less fuel-efficient vehicle, moving closer to or farther from work, or making different use of public transit, may matter only if higher prices persist.2 On the supply side, refinery utilization, net exports, and inventories can adjust to a limited extent in the short run.

To assess the interplay of these factors, we draw on Coyle, DeBacker, and Prisinzano (2012), who jointly estimate gasoline supply and demand using shifts in disposable income and supply disruptions from wars and natural disasters. (Because there are no federal gas tax holidays in the historical record, they cannot directly assess their effects.) Their results imply pass-through to consumers of about 80%.3 Evidence from past sub-national holidays points in the same direction.4 However, evidence from state-level gas tax holidays may have limited relevance to a federal gas tax holiday, for which the adjustment opportunities are more limited on the supply side: suppliers can more readily reroute supplies across state lines than across countries.

Given the uncertainty about pass-through from a federal holiday, we show results for three pass-through scenarios—50% (low), 80% (central), and 100% (upper bound)—applied as a uniform rate to every household. In the central case the pump price falls about 14.7 cents per gallon, versus 9.2 cents at 50% and the full 18.4 cents at 100% pass-through. We visualize these scenarios in Figure 1 below, comparing them with the gas price increase from late February through early June.

It is somewhat clearer how the consumer-side benefits of a gas tax holiday would be distributed across the population. To estimate how gasoline use varies within and across income groups, we use the Consumer Expenditure Survey (CEX) and National Household Travel Survey (NHTS). We convert CEX-derived gasoline spending into gallons using regional Energy Information Administration retail prices, then scale those implied gallons within each census region to match gasoline use as measured in the NHTS. We find the following results.

• The average effect is small relative to recent price increases. At 80% pass-through, a holiday saves the average household about $148 over a full year or $37 over a three-month holiday. As shown in Figure 1, under our central scenario a gas tax holiday offsets about 11% of the observed rise in gas prices from February 23 (the week before the war began) to June 1st.5
• Gasoline consumption is highly concentrated. Figure 2 shows the share of total gas consumption (by volume) accounted for by each gas-consumption quintile.6 The top quintile of gas purchasers are responsible for about half of total gasoline consumption, roughly double the amount consumed by the bottom 60%. Because gas-tax-holiday relief is proportional to gallons purchased, the same shares describe how relief is distributed across gasoline-use groups.

• Across income quintiles, higher-income households would receive more dollars, while lower-income households would receive more relative to income. In dollar terms, the benefit rises with income. As shown in Figure 3, under 80% pass-through, annualized savings run from about $72 in the bottom quintile to $214 in the top quintile. Figure 4 shows that the pattern reverses when benefits are displayed as a share of income, falling from about 0.43% for the bottom quintile to 0.08% for the top.  

• Gasoline consumption varies more within income groups than across them. As shown in Figure 5, average annualized savings rise by about $142 from the bottom income quintile to the top, but the 10th-to-90th percentile range within each quintile is larger than that. In the bottom income quintile, annualized savings run from $0 at the 10th percentile to $174 at the 90th, with a mean of $72. The within-quintile range is even wider higher up the income distribution, at $361 between the 10th and 90th percentiles in the top quintile.
• Many receive little benefit from this policy. In Figure 6 we examine what share of households in each income quintile would receive negligible relief. About 35% of bottom-quintile households would save $25 or less over a full year, compared with about 5% of the top quintile.

A federal gas tax holiday would likely offset a small portion of the increase in gas prices since before the Iran conflict: about $37 over three months against a gasoline expenditure hike of about $250 over the same time period. Benefits accrue to the households that burn the most fuel, which can be found throughout the income distribution.

The authors are grateful to Alex Brill and Ryan Cummings for insightful feedback on an earlier draft.