Energy price increases are hitting Americans hard. In the March 2026 Everyday Price Index, my colleague Pete Earle noted that the Iran war drove up energy prices, with adjacent industries feeling the impact, while core inflation remained muted. These price increases resemble an energy shock rather than broad-based inflation that might concern the Fed.
For ordinary Americans, however, Earle comments, “consumers are first encountering the shock in the most visible and psychologically powerful places — gas stations, travel, and transportation-linked expenses — while the rest of the basket remains relatively stable.”
The “visible and psychologically powerful” price increases have many policymakers rightly concerned. Both Indiana and Georgia have enacted state gas tax holidays while Utah will implement one from July through December. Several states are also considering issuing similar policies, and federal lawmakers have proposed a nationwide gas tax holiday.
Concerns about affordability are genuine, but this is a case where good intentions do not guarantee good outcomes. Our present strains at the pump are due to limited supply. Pausing gas taxes will not increase the supply of gas. Instead, policymakers should focus on regulatory reforms that lower energy production costs and reduce bottlenecks.
Reasoning from the Pump Price
Prices act as a signal that informs buyers and sellers how much of a good or service is available and how much others want that good or service. Scott Sumner’s insight, “people should never reason from a price change, but always start one step earlier—what caused the price to change” is essential here.
The legal incidence (who is legally obligated to pay the tax) falls on wholesalers or retailers while the economic incidence (who bears the cost of a tax) falls on consumers. Consumer demand for gas is relatively less elastic than other goods and services in the short run, meaning people are willing to forgo other spending before reducing fuel consumption.
When prices rise due to a supply shock, consumers continue purchasing gasoline. A tax holiday can, therefore, increase demand at precisely the worst moment. Evidence from past tax holidays and disaster responses shows that such policies often shift consumption, but do not provide lasting relief.
When refining capacity, inventories, or distribution networks tighten, the benefits of tax cuts dissipate. In those conditions, tax holidays provide less relief precisely when relief is needed the most.
Gas tax holidays must be judged by their outcomes. Understanding the cause of price increases helps policymakers avoid responses that are ineffective or do further damage.
What Can Be Done?
The good news is that there are some reforms that federal and state policymakers can accomplish to help the American people. While avoiding gas tax holidays prevents additional harm, they can focus on getting government out of the way through regulatory reforms that improve supply.
Policymakers should reform regulations that currently constrain oil and gas production and create supply chain bottlenecks. Federal actions include accelerating leasing, streamlining permitting processes, and reining in executive discretion over permitting, which allows the President to revoke permits that go against a given administration’s preferred energy agenda. States can roll back renewable portfolio standards to reduce compliance costs and ease permitting bottlenecks. They can also exit regional cap-and-trade programs to lower costs often passed to consumers.
Additionally, with the Greenhouse Gas Endangerment Finding rescinded, now is the time to conduct regulatory audits to assess the costs and benefits of regulations. Policymakers could enact regulatory budgets that cap the number of regulations in force at any given time. Finally, they should consider sunset requirements that remove regulations after a certain period unless explicitly renewed by the legislative branch.
The Problem Isn’t Gas Prices — It’s Supply
Gas tax holidays might be politically attractive, but they do not expand supply nor ease supply chain constraints. They can even worsen shortages by increasing demand.
A more effective approach focuses on reducing regulatory barriers and improving energy market flexibility. This approach can address some of the root causes of policy volatility during and after the supply shock.
Prices work best when they are treated as signals, not problems to suppress. By understanding how and why prices change and minimizing interference in the price system, policymakers can avoid doing unintentional harm.
