Research & Commentary: Federal Gasoline Taxes

Published February 18, 2015

According to Forbes, the Congressional Budget Office has estimated that in 2024 alone the Highway Trust Fund will spend $18 billion more than it brings in. The CBO estimates the cumulative shortfall over the next decade will top $160 billion. Several members of Congress have begun to push for an increase in the federal motor fuel tax to shore up the trust fund and increase funding for repairs and improvements to infrastructure. 

The proposal receiving the most attention, by Sens. Bob Corker (R-TN) and Chris Murphy (D-CT), would raise the federal gas tax by 12 cents over two years and index it to inflation, USA Today reports. The Highway Trust Fund is currently operating under a temporary funding fix that ends in May. Several states are delaying projects until Congress addresses the funding problem. 

The shortfall has been caused in part by declining gasoline prices and increasingly fuel-efficient vehicles. Motor fuel taxes are paid as an excise duty – a tax on the sale price of gasoline and diesel fuel. When gasoline prices are low or less gasoline is consumed, motor fuel taxes decline. 

The U.S. federal excise tax has been 18.4 cents per gallon of gasoline since 1993. While that seems a long time without an increase, it’s important to note federal gasoline taxes do not exist in a vacuum. Consumers pay motor fuel taxes at the state and local levels as well, and those taxes increase regularly. On average, consumers pay 21.0 cents per gallon in state gasoline excise taxes and 9.4 cents per gallon in local taxes and miscellaneous environmental fees. All told, consumers on average pay 48.8 cents per gallon at the pump in federal, state, and local gasoline taxes. 

Critics of the gasoline tax increase argue legislators should not use the current dip in gasoline prices as an excuse to hike taxes, and they note a tax hike would raise prices not just on gasoline but also on goods and services throughout the economy. These increased costs, passed on to consumers, would have a stronger effect on lower- and middle-income families, acting as a regressive tax hike. A letter sent to Congress by Americans for Prosperity estimated falling gas prices “amount to nearly $100 extra per month for an average family, which is expected to lead to an additional $100 billion of economic growth. Congress should embrace these lower prices, not confiscate the savings, increase costs, and weaken growth potential.” 

Opponents also criticize the idea of indexing the gas tax to inflation. Americans for Tax Reform argues 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 the three states that currently index their gas taxes to inflation]. So citizens in these states are hit even harder by gas price increases,” ATR notes. 

The main problem with transportation funding lies not with revenue, but with spending. Far too many dollars in the Highway Trust Fund are spent on projects unrelated to roads, such as transit, bike paths, and museums. If gas taxes are to be a true user fee, gas tax dollars should be spent on roads alone. In The Wealth of Nations Adam Smith noted when infrastructure is constructed and maintained using user fees and decentralized from government, new construction occurs only when the market demands it. 

States and the federal government must explore more modern and more efficient ways to fund road construction and traffic infrastructure, such as privatizing roads and establishing toll systems. In several cities, transportation agencies are using congestion pricing – varying tolls 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.

Rethinking How We Pay for Transportation
Has the time come to reconsider the way we pay for transportation? Kenneth Orski examines this question and the debate over the future of the Highway Trust Fund and fuel tax revenue as the main source of funds for the federal transportation program.    

Don’t Increase Federal Gasoline Taxes – Abolish Them  
Jerry Taylor and Peter Van Doren of the Cato Institute examine federal gasoline taxes and argue for their repeal: “State and federal gasoline taxes should be abolished. Local governments should tax gasoline only to the extent necessary to pay for roads when user charges are not feasible. If government feels compelled to more aggressively regulate vehicle tailpipe emissions or access to public roadways, pollution taxes and road user fees are better means of doing so than fuel taxes.” 

Alternatives to the Motor Fuel Tax
The Center for Urban Studies at Portland State University evaluates the potential for alternatives to motor fuel taxes in a report submitted to the Oregon Department of Transportation. The study also analyzes the economic and technological problems that must be addressed in designing alternative revenue sources. 

Designing Alternatives to 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
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
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
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.” 

Tying the Gas Tax to Inflation: Not a Good Idea
Kyle Pomerleau of Americans for Tax Reform discusses states’ efforts to tie the gas tax rate to inflation. ATR argues indexing gasoline taxes removes governments’ accountability and will increase gas prices considerably as oil prices increase. 

State Motor Fuel Taxes: January 2015
The American Petroleum Institute documents the current motor fuel taxes (both gasoline and diesel) of each state. 

Paying at the Pump: Gasoline Taxes in America
Writing for the Tax Foundation, Jonathan Williams examines the history of motor fuel taxes in the United States. Williams argues gas taxes can be an effective means of funding transportation improvements but have been exploited for political reasons and diverted away from their intended use. 

Reconsider the Gas Tax: Paying for What You Get
Jeffrey Brown of the University of California-Los Angeles notes the gasoline tax was developed as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of its 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.


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