Policy Documents

Research & Commentary: State Motor Fuel Taxes

February 25, 2013

Several states across the country are considering increases in their motor fuel taxes to fund repairs and improvements to infrastructure. These taxes, which are paid as an excise duty—a tax on the sale of gasoline and diesel fuel—increase the cost of transportation for individuals.

In recent years, however, the rise of fuel-efficient cars has decreased motor fuel tax coffers and disproportionately shifted the burden to low-income drivers, who typically own older, less fuel-efficient vehicles. In addition, governments have increasingly diverted funds from this tax away from their intended purpose in order to balance budgets or fund unrelated projects.

The U.S. federal excise tax takes 18.4 cents per gallon of gasoline. The average state gasoline excise tax is 21.0 cents per gallon. Consumers pay more than just those taxes on their fuel bills: other taxes and fees applied include sales taxes, gross receipts taxes, oil inspection fees, county and local taxes, and other miscellaneous environmental fees, collectively averaging 9.4 cents per gallon. Adding these taxes and fees results in a volume-weighted average state and local tax of 30.4 cents per gallon.

Thus, federal, state, and local governments collect on average 48.8 cents per gallon at the pump in taxes. For comparison, ExxonMobil, the company primarily responsible for the exploration, refining, distribution, and marketing for the gasoline they sell at retail, gains a profit of only about $0.07 per gallon of gasoline sold.

Several states, including Maine, Nebraska, North Carolina, and Wisconsin, have enacted rules tying state motor fuel taxes to inflation, raising taxes automatically. Opponents of that strategy, including Americans for Tax Reform, say the automatic increase makes politicians and regulators less accountable for gas tax hikes. It 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,” ATR notes.

Rising fuel efficiency is not a bad thing, but as that rise continues, motor fuel tax revenues will continue to decline. States will have to explore more modern and efficient ways to fund road construction and traffic infrastructure. These include privatizing roads or establishing toll systems. In several cities, transportation agencies are using congestion pricing—varying toll prices based on congestion—to manage demand and limit traffic problems.

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

 

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 increased use of road pricing as a substitute for fuel taxes. 

Research & Commentary: Congestion Traffic Pricing
http://heartland.org/policy-documents/research-commentary-congestion-traffic-pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under congestion pricing, operators of a road charge a variable price based on congestion, allowing the operator to manage demand and limit congestion. Heartland Institute Senior Policy Analyst Matthew Glans examines several proposals for implementing a pricing system to alleviate traffic congestion. 

Fuel Taxes, Tolls Pay for Only One-Third of Road Spending
http://news.heartland.org/newspaper-article/2013/02/08/fuel-taxes-tolls-pay-only-one-third-road-spending
Joseph Henchman of the Tax Foundation examines how states acquire transportation funds and finds highway user taxes and fees made up just 32 percent of state and local spending on roads; the rest of the projects were financed out of general revenues, including federal aid. 

Raising Gas Taxes Won’t Fix Our Bridges
http://reason.org/files/59f2e045a676b9c69bb9139b2c217bf3.pdf
In the aftermath of the I-35 bridge collapse in Minneapolis, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. He writes, “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.” 

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 what they see as 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. 

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 2013
http://www.api.org/oil-and-natural-gas-overview/industry-economics/~/media/Files/Statistics/gasoline-diesel-summary.ashx
The American Petroleum Institute documents the 2013 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. 

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, he argues, 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. 

 

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 Budget & Tax 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 or Policy Analyst Taylor Smith at 312/377-4000 or by email at mglans@heartland.org or tsmith@heartland.org.