Policy Documents

Research & Commentary: Gasoline Taxes

July 17, 2012

(An updated verison of this policy document can be found here)

Motor fuel taxes affect everyone who uses any kind of transportation. These taxes, which are paid as an excise duty – a tax on the sale of motor fuel – increase the cost of transportation for individuals. They are designed by most national and state governments to raise revenue for improvements to the overall transportation system, including roads, bridges, and airports. In recent years, however, governments have increasingly diverted funds from this tax away from their intended purpose, in order to balance budgets or fund unrelated projects.

The United States federal excise tax takes 18.4 cents per gallon of gasoline and 24.4 cents per gallon for diesel fuel. On average, state and local bodies take another 31.1 cents for gasoline and 30.2 cents for diesel, per gallon. That means consumers in the United States pay at the pump on average 49.5 cents per gallon for gas and 54.6 cents per gallon for diesel in excise taxes. As gasoline prices increase, consumers have begun to push back against proposed increases in the gas tax.

Several states, including Maine, Nebraska, North Carolina, and Wisconsin, have enacted rules automatically tying state gas taxes to inflation. Opponents of that strategy, including Americans for Tax Reform, say the automatic increase makes politicians and regulators less accountable for gas tax hikes. This also creates a bad feedback loop because the price of gasoline is included in the calculation of the Consumer Price Index: “So as the price of gas goes up, this creates upward pressure on the CPI. In turn, this increases the gas taxes in these states. So citizens in these states are hit even harder by gas price increases,” notes ATR.

Many experts contend the gas tax is reasonable, so long as legislators use the funds for their intended purposes. Jonathan Williams of the American Legislative Exchange Council, for example, writes, “When lawmakers do overcome the temptations to squander gasoline tax funds, and instead use the revenue strictly for road construction and maintenance, gasoline taxes can serve as a reasonable tax.”

Critics of gasoline taxes argue the levies are regressive, having a greater effect on the poor than on the wealthy. Some proposed alternatives for funding road construction and traffic infrastructure are privatizing roads, congestion fees, and automobile insurance premiums based on consumer use.

The following articles examine motor fuel taxes, how they are applied, and their economic effects, from multiple perspectives.

Don’t Increase Federal Gasoline Taxes—Abolish Them
http://heartland.org/policy-documents/don%E2%80%99t-increase-federal-gasoline-taxes-abolish-them
Jerry Taylor and Peter Van Doren of the Cato Institute argue that pollution taxes, congestion fees, and automobile insurance premiums that are more closely related to vehicle miles traveled are better remedies for the externalities associated with automobile travel than a simple fuel tax.

Five Myths about your Gasoline Taxes
http://www.cnn.com/2011/11/18/opinion/tsay-gordon-gas-tax-myths/index.html
Shin-pei Tsay and Deborah Gordon of the Leadership Initiative for Transportation Solvency in the Energy and Climate Program at the Carnegie Endowment for International Peace write for CNN about several misconceptions about gasoline taxes, arguing the gas tax is a good investment.

Rethinking Maryland’s Proposed Gas Tax Increase
http://mdpolicy.org/research/detail/rethinking-marylands-proposed-gas-tax-increase
Wendell Cox and Ronald Utt examine the misallocation of more than half of Maryland’s transportation funds to be spent on transit, and they document the inequities a fuel tax increase creates among households of different income levels.

Md. Governor Wants More Road Money—After Diverting $1 Billion
http://news.heartland.org/newspaper-article/2012/02/15/md-governor-wants-more-road-money-after-diverting-1-billion
Phil Britt writes in the Heartlander digital magazine about Maryland Gov. Martin O’Malley’s efforts to raise revenue by applying the state’s 6 percent sales tax to motor fuel purchases. O’Malley and other proponents of the tax expansion say it would provide funding to help with road repairs and other transportation needs. Britt speaks with opponents who point out the transportation fund is low only because state officials have been raiding it for non-transportation spending.

Tying the Gas Tax to Inflation: Not a Good Idea
http://atr.org/tying-gas-tax-inflation-good-idea-a6983
Kyle Pomerleau of Americans for Tax Reform discusses the efforts by some states to tie the gasoline tax rate to inflation. ATR argues indexing gasoline taxes removes accountability and will increase gas prices considerably as oil prices increase.

Gasoline Taxes: January 2012
http://www.api.org/statistics/fueltaxes/upload/gasoline-diesel-summary.pdf
The American Petroleum Institute documents the 2012 motor fuel taxes (both gasoline and diesel) of each state.

Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-america
Writing for the Tax Foundation, Jonathan Williams examines the history of motor fuel taxes in the United States. Williams contends gas taxes can be an effective means of funding transportation improvements but have been exploited for political reasons away from their intended use.

Local, State and Federal Gas Taxes Consume 45.9 Cents Per Gallon on Average
http://taxfoundation.org/article/local-state-and-federal-gas-taxes-consume-459-cents-gallon-average
Jonathan Williams of the Tax Foundation examines the combined local, state, and federal gasoline taxes for each state.

Reconsider the Gas Tax: Paying for What You Get
http://heartland.org/policy-documents/reconsider-gas-tax-paying-what-you-get
Jeffrey Brown of the University of California-Los Angeles notes the gasoline tax was invented as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of the tax’s original purpose and lump it together with other unpopular taxes. The challenge for policymakers is to restore the connection in the public’s mind between the tax and the roads it provides and to reassert the gasoline tax’s original rationale as a user fee.

Replace Gas Taxes
http://www.cato.org/multimedia/daily-podcast/replace-gas-taxes
In a Cato Institute podcast, Senior Fellow Randal O’Toole discusses gasoline taxes and suggests how they could be reformed or replaced.

Alternatives to the Motor Fuel Tax
http://heartland.org/policy-documents/alternatives-motor-fuel-tax
This report from the Center for Urban Studies at Portland State University evaluates the potential for alternatives to motor fuel taxes and was submitted to the Oregon Department of Transportation. The report also analyzes the economic and technological problems that must be addressed in designing alternative revenue sources.

Designing Alternatives to State Motor Fuel Taxes
http://heartland.org/policy-documents/designing-alternatives-state-motor-fuel-taxes
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor fuel taxes as more fuel efficient vehicles become available, and they report on the economic effects of more extensive use of road pricing as a substitute for fuel taxes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Tech News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.