Policy Tip Sheet: Gas Taxes are not the Long-Term Solution to Funding Transportation

Published July 11, 2019


Gasoline taxes are an unreliable funding source for state transportation projects, road construction, and maintenance due to declining gasoline prices and more fuel-efficient vehicles. In 2015, Daniel Vock, writing for Governing, analyzed state gas tax data reported to the U.S. Census Bureau and found two-thirds of state fuel taxes failed to keep up with inflation.

Moreover, gasoline taxes are regressive and produce widespread economic consequences. Increasing fuel taxes leads to higher prices on goods and services throughout the economy. These additional costs are inevitably passed on to consumers, with an especially negative impact on lower- and middle-income families.

In a Maryland Public Policy Institute study, Wendell Cox and Ronald Utt argue gas taxes have a significantly greater detrimental effect on lower- and middle-income families than they do on the wealthy. Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional spendable income per month for an average family.

The main reason for inadequate transportation funding is not lack of revenue. Actually, far too many dollars are spent on projects unrelated to roads, such as rail, bike paths, and museums.

Policy Solution

Profligate spending is an issue that has long plagued transportation funding. Bloat, inflated labor costs, and unneeded bureaucracy often increase the budgets of new infrastructure projects far above initial estimates.

One very simple reform lawmakers ought to consider is limiting the use of gas tax dollars to fund transportation projects. Other reforms state lawmakers should consider include creating a transportation funding “lockbox,” which reserves gas tax dollars for transportation projects, or a requirement that a portion of surplus funds be dedicated to road projects.

As more fuel-efficient vehicles enter the market, gasoline tax revenues will continue to decline. Consequently, state lawmakers will need to consider more modern and effective ways to fund road construction and traffic infrastructure, which should include privatizing roads and 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.

Another method to reduce outrageous transportation costs is to eliminate project labor agreements and prevailing wage laws. A project labor agreement (PLA) is a pre-hire collective bargaining pact establishing the terms and conditions of employment for a specific construction project. PLAs unfairly benefit organized labor and increase project costs borne by taxpayers. Studies by the Beacon Hill Institute and New Jersey Department of Labor found PLAs increase a project’s base construction bid and building costs.

Prevailing wage laws are a form of centralized planning and wage control that increases government-contracted construction costs, reduces competition, and politicizes public projects. These laws force contractors to set unnecessarily high labor rates, often without any consideration for the type of work being done or employee skill levels.

One reform that should be avoided is automatically indexing future gas tax increases to commodity prices or the Consumer Price Index. Indexing is problematic because it makes politicians and regulators less accountable for tax changes and can place upward pressure on the very measures used to determine the rate.

Policy Message

Point 1: Relying on gas taxes to fund transportation projects will hurt states in the long run because gas tax hikes raise prices on goods and services throughout the economy.

Point 2: Gas taxes have a detrimental effect on lower- and middle-income families than they do on the wealthy.

Point 3: The real problem with transportation funding is not lack of revenue, but poor spending.

Point 4: States should remove unnecessary cost drivers such as prevailing wage laws and project labor agreements.

Point 5: Indexing gas taxes removes accountability for policymakers and will likely accelerate tax increases.