President Donald Trump Has Floated the Idea of a Federal Gas Tax Holiday, but It Would Likely Backfire

From a statistical standpoint, investors have to be thrilled with the stock market’s performance under President Donald Trump. Following gains of 57%, 70%, and 142%, respectively, for the ageless Dow Jones Industrial Average (DJINDICES:^DJI), broad-based S&P 500 (SNPINDEX:^GSPC), and growth stock-inspired Nasdaq Composite (NASDAQINDEX:^IXIC) during his first non-consecutive term, this trio has added 18%, 30%, and 40% since the start of his second term, as of the closing bell on Oct. 7.

While the annualized return of equities under Trump has been higher than under most other presidents over the last 130 years, Wall Street’s skyrocketing stock indexes may not be painting a complete picture of the challenges consumers and corporate America are facing.

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For example, persistently elevated inflation can no longer be swept under the rug. For 66 consecutive months, the prevailing inflation rate has been above the Federal Reserve’s long-term 2% target. Though modest inflation (rising prices) is perfectly normal for a growing economy, elevated inflation can pinch consumers’ pocketbooks and eventually hurt corporate growth prospects.

Image source: Official White House Photo by Daniel Torok.

President Trump has an idea to alleviate some of these pricing pressures for everyday Americans and the transportation industry — a federal gas tax holiday — but it would almost certainly backfire.

Donald Trump wants to temporarily shelve the federal gas tax

On Feb. 28, Trump approved military action against Iran, leading to the latter closing the Strait of Hormuz and effectively halting the daily flow of a fifth of the world’s crude oil supply. This roughly seven-month (and counting) closure of the Strait of Hormuz has sent energy prices soaring. Gas prices jumped at the fastest pace in three decades in April-May, while diesel prices reached a record high of $6.53 per gallon in September.

Even though the average American household only spends 3.1% on gas annually, according to research by The Motley Fool, fuel costs are one of the most visible measures of inflation for consumers.

Double-digit year-over-year jumps in gas and diesel prices were the primary catalysts that lifted the annualized inflation rate to a three-year high of 4.2% in May. Surging energy commodity prices have also played a role in kick-starting only the fourth Fed rate-hiking cycle of the 21st century.

To quell some of these energy-driven pricing pressures, Donald Trump is considering temporarily suspending the federal gas and diesel taxes, which amount to 18.4 and 24.4 cents per gallon, respectively.

President Trump’s loosely floated proposal comes after a signed executive order on Oct. 5 to expand the use of tax-free red-dyed diesel for American truckers. Red-dyed diesel is exempt from the federal diesel tax and used for farm equipment. Expanding its use to long-distance trucking could lower costs for the trucking industry.

However, President Trump can’t simply suspend the federal gas and diesel taxes with an executive order. He’d need the approval of Congress, which he’d more than likely not get. Even if every Republican in the House and Senate voted in favor of this measure, which is highly unlikely, the president would need seven Democrats/Independents in the Senate to vote in favor of a temporary suspension.

But getting a federal gas tax holiday approved on Capitol Hill would likely be the least of Donald Trump’s worries.

Image source: Getty Images.

Suspending the federal gas/diesel tax would backfire on the president (and stock market)

On paper, the logic is simple: lower fuel costs put more disposable income in consumers’ pockets, likely leading to stronger spending and a continuation of America’s expanding economy. But things in the real world don’t always work out as they’re drawn up on paper.

Hypothetically, if President Trump were successful in suspending the federal gas and diesel tax, there could be more problems than solutions.

To begin with, it would reduce the Highway Trust Fund’s monthly revenue by about $3.5 billion. The Highway Trust Fund finances federal spending on interstate highways and bridges, among other projects.

According to the Committee for a Responsible Budget, a nonpartisan public policy think tank, the Highway Trust Fund is projected to be insolvent by 2028. Removing approximately $3.5 billion per month would accelerate this insolvency and, in turn, the need for federal spending cuts on infrastructure projects.

Secondly, but building on the previous point, suspending the federal gas and diesel tax would further expand an already out-of-control federal deficit. Since 2020, the federal government has spent between $1.38 trillion and $3.13 trillion more per fiscal year (the government’s fiscal year ends on Sept. 30) than it has generated in revenue.

In mid-August, U.S. total debt surpassed $40 trillion and should continue to climb as long as federal deficits remain unchecked. Removing even more revenue from the equation via a gas tax holiday would only add to America’s total debt and send long-duration bond yields (10-, 20-, and 30-year Treasury yields) to the moon.

Long-duration Treasury yields guide everything from mortgage rates to corporate borrowing costs. The larger America’s total debt grows, the more likely higher lending costs are to adversely affect businesses and pressure the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.

Lastly, a gas tax holiday ignores the response of suppliers. More than likely, suppliers would attempt to capture some of the savings (18.4 cents/gallon for gas and 24.4 cents/gallon for diesel) by raising their prices. This would offset some of the benefits of a gas tax holiday.

The painful reality for consumers and businesses is that there isn’t a quick fix to historically high fuel prices. As long as the Trump-led Iran war persists, energy supply disruptions are likely to propel energy commodities higher.

Even when the Iran war ends, fuel prices could take several quarters to return to “normal.” It’ll take several months for the region’s infrastructure to ramp up, and potentially longer for oil reserves to be rebuilt.

In other words, a federal gas tax holiday would probably backfire on President Trump and the stock market.

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President Donald Trump Has Floated the Idea of a Federal Gas Tax Holiday, but It Would Likely Backfire was originally published by The Motley Fool