In Focus delivers deeper coverage of the political, cultural, and ideological issues shaping America. Published daily by senior writers and experts, these in-depth pieces go beyond the headlines to give readers the full picture. You can find our full list of In Focus pieces here.
Republicans are scrambling to show the public they are trying to reduce the cost of living before November’s midterm elections. Some want to use new tax policies in a proposed third reconciliation bill to do that. If they do, two changes are best suited politically and economically: temporarily suspending the federal gasoline tax and reducing the payroll tax by 2 percentage points for the remainder of the year.
Rising gas prices are one of the big political problems the GOP is facing this year. President Donald Trump is clear that he will not sacrifice his long-term goal of ensuring that Iran does not get a nuclear weapon on the altar of short-term politics. That removes the easiest way to reduce gas prices: End the war with Iran and reopen the Strait of Hormuz.
Temporarily suspending the federal gasoline tax is a small but tangible way to cut prices at the pump in lieu of ending the war. Drivers pay a bit over 18 cents per gallon each time they fill up, while truck drivers pay more than 24 cents per gallon for diesel fuel. Suspending the tax for the duration of the closure of the strait would lower prices at the pump, letting drivers see each time they fill up their tank that Congress is trying to do something to help.
Republicans could go even further if they offered to give states that suspend their gas taxes 100% of the lost revenue. States often levy much higher per-gallon taxes than does the federal government, with rates as high as 71 cents per gallon. Some states also impose their sales tax on top of the per-gallon gas tax, raising the tax portion of gas even higher. This approach would cut gas prices substantially, offsetting a significant portion of the recent price rise.
Gas taxes pay for road and transit programs, so the government would need to increase the deficit to pay for this relief. But any tax cut to address the cost of living would require that, unless the cost were offset by spending cuts. The politics of the situation dictate that it would be wiser to borrow more for a few months rather than shift the public discussion to the programs being cut to pay for the tax relief.
Temporarily reducing the payroll tax by 2 percentage points would be another way to deliver immediate help to consumers. Doing that would increase people’s take-home pay, something they would immediately see. Someone making the median family income of $105,800 would get over $2,000 in annual tax relief under this approach. That would both get people’s attention and help pay for groceries and other staples.
That would be even more expensive than the gas tax since payroll taxes raise so much money. That suggests the reduction should be for only a short time, perhaps the last six months of the year. It would still provide significant, visible assistance at a time when people need it.
Other proposed tax plans fail to meet the political or economic tests. The most talked about one, indexing capital gains for inflation, would not be noticed by the average person because most people either report no capital gains or only a small amount. The Peter G. Peterson Foundation estimates that households earning $50,000 a year or less had only $215 in capital gains in 2023, while those earning between $50,000 and $100,000 had under $500. Indexing those tiny gains for inflation would at best cut the average household’s taxes by only a few dollars, barely enough to pay for a meal at McDonald’s.
Moreover, people wouldn’t see even those tiny benefits until next year when they file their income taxes. A tax plan that is designed to show voters that Republicans are trying to reduce the cost of living needs to be visible now, not next April 15, after Democrats have already taken over control of Congress.
Cutting income tax rates also wouldn’t do the trick since so many taxpayers already pay little to no income tax. Roughly 40% of all taxpayers do not pay income tax as a result of the many deductions and credits available. These people tend to be the lower and middle-income households that are most stretched by rising prices. Cutting tax rates won’t give them any help at all.
HENRY OLSEN: TRUMP ISN’T LOOKING FOR AN EXIT IN IRAN
This approach could also backfire politically because the benefits would flow to people who already make above-average incomes. That would be true even if the rate cuts are limited to the bottom two tax brackets because of how a progressive income tax system works. Even the richest taxpayers have some of their income taxed at the lowest rates, so they would get something if those rates were cut, even as the people who struggle most get nothing. That’s not a good look.
There are good budgetary and economic arguments against trying to use tax policy to address the current price hikes. But if Republicans are resolved to put politics first, it’s best they pick highly visible plans that have the most impact on family budgets. Suspending gas taxes or part of the payroll tax passes that test — jiggering with capital gains or income tax rates doesn’t.