According to The State, the South Carolina Transportation Department has claimed it needs an additional $1 billion per year to repair and maintain the state’s roads. As a result, South Carolina legislators are now considering a substantial increase to the state’s motor-fuel tax to cover the looming costs created by an aging transportation system and the decreasing return on the current gasoline tax. The new proposal would increase the current 16.75-cent-per-gallon tax by 2 cents per year over five years, setting the new rate at 26.75-cent-per-gallon. South Carolina’s gas tax is currently below the average state gas tax of 28.9 cents per gallon.
In addition to the fuel tax increase, the new proposal includes several new “fees,” which are better described as taxes, including a $16 vehicle registration fee to be paid every two years, an increase in the sales tax for automobiles, and a one-time fee of up to $250 if a driver buys a vehicle out of state and registers it in South Carolina.
While supporters of a gas tax hike argue South Carolina’s low rate leaves room for an increase, gas taxes at any level have become increasingly ineffective at generating revenue for infrastructure projects. There is growing evidence gasoline taxes are ineffective, regressive taxes that have increasingly left transportation systems shortchanged.
In recent years, the rise of fuel-efficient cars has decreased motor-fuel-tax coffers and disproportionately shifted the burden to low-income drivers, a group that typically owns older, less-fuel-efficient vehicles. The proposal attempts to address this growing problem by charging owners of electric vehicles a fee of $120 every two years and hybrid vehicle owners a fee of $60 every two years.
The fact gas taxes have not increased over time does not mean they need to be increased now. Increased taxes on gasoline create an unnecessary burden on all South Carolinians, but especially on the state’s poorest people. Gas taxes are a regressive tax hike that Wendell Cox and Ronald Utt argue have a stronger effect on lower- and middle-income families than they do on the wealthy. The tax could also cause low-income families to drive less, which could reduce employment options.
South Carolina needs to address systemic problems in the Department of Transportation before any tax hikes are considered, argues Daniel Brennan, the state director of Americans for Prosperity-South Carolina. “While we recognize the great need to improve South Carolina’s roads, it is important to remember that without meaningful reform to the Department of Transportation, tax increases are almost meaningless,” wrote Brennan. “A series of tax and fee increases on our roads, vehicles, and gasoline won’t solve the problem alone. South Carolina needs a DOT that is accountable to the citizens as a true cabinet agency. Taxpayers deserve a revenue neutral bill that tackles meaningful tax reform and creates an accountable DOT – not a laundry list of new and increased taxes to send to Columbia in hopes for a better outcome.”
The main problem with transportation funding lies not with revenue but with spending. Far too many dollars are spent on projects unrelated to roads, such as bike paths and museums. If gas taxes are intended as a user fee, gas-tax dollars should be spent on roads alone. In The Wealth of Nations, Adam Smith argues when infrastructure is constructed and maintained using user fees and decentralized, new construction occurs only when market demand justifies it.
It is not appropriate to add the burden of additional tax or fee increases on households that are already cash-strapped. A tax hike would raise prices on goods and services throughout the economy, not just on gasoline because virtually all consumer goods are transported using gasoline-powered transportation. Businesses will simply pass the added costs on to consumers.
South Carolina legislators need to explore innovative and 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 toll prices based on congestion—to manage demand and limit traffic problems.
The following documents provide additional information about how motor-fuel taxes are applied and the impact they have on states’ economies.
Alternatives to the Motor Fuel Tax
This report, prepared by the Center for Urban Studies at Portland State University and submitted to the Oregon Department of Transportation, evaluates potential alternatives to motor-fuel taxes. The report also identifies the economic and technological problems that must be addressed when 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. They also report on the economic effects of road pricing as a substitute for fuel taxes.
Paying at the Pump: Gasoline Taxes in America
Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation improvements.
State Motor Fuel Taxes: January 2017
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel).
Reconsider the Gas Tax: Paying for What You Get
Jeffrey Brown of the University of California–Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of this purpose and lump it together with other unpopular taxes. The challenge for policymakers, Brown argues, is to restore the connection in the public’s mind between the tax and the roads it should provide.
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 Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.
Fuel Taxes, Tolls Pay for Only One-Third of Road Spending
Joseph Henchman of the Tax Foundation finds highway user taxes and fees made up just 32 percent of state and local spending on roads. Financing for the rest of the projects came 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, Minnesota, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. Moore wrote, “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.”
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 website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s state government relations manager, at [email protected] or 312/377-4000.