Research & Commentary: Hiking Alabama’s Gas Tax Won’t Solve Funding Issues

Published March 8, 2019

According to a 2017 The Road Improvement Program report, Alabama’s decaying roads and bridges cost drivers $4.2 billion annually in vehicle operation costs, safety, and congestion. The report revealed 19 percent of the Yellowhammer State’s major urban roads were in poor condition and 8 percent of the bridges were structurally deficient. Many critics blame these infrastructure problems on the lack of sufficient gas tax revenue; Alabama last increased its fuel tax in 1992.

The Alabama Legislature is holding a special session to address the shortfall. A bill, sponsored by state Rep. Bill Poole (R-Tuscaloosa), would increase the current 18-cent-per-gallon gas tax to 28 cents over the next three years. The gas tax rate would also gradually increase, by up to 1 cent per year starting in 2023, depending on national construction costs.

Although these automatic increases are not the same as indexing, which is the more commonly used strategy to increase the gas tax annually in other states, the proposed legislation would similarly keep the decision to increase the tax out of the hands of lawmakers, reducing accountability for the tax.

The shortfall in gas tax revenue is not surprising. Gasoline taxes are ineffective and have increasingly left transportation systems shortchanged. 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 have failed to keep up with inflation and fuel-tax-related revenue has dramatically dropped. 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.

Poole’s measure attempts to address the effect of fuel-efficient vehicles on gas tax revenues by implementing a new $200 fee on electric vehicles and a $100 fee on plug-in hybrids. Those fees would also increase over time, rising by $3 every four years. If any federal taxes on electric vehicles are imposed, these increases would be reduced.

However, the bill would also utilize a portion of these fees to fund the expansion of electric vehicle infrastructure, with the goal of providing funds until 4 percent of registered vehicles in Alabama—excluding trailers and semitrailers—are composed of electric vehicles and hybrids. This would most likely exacerbate the effect electric vehicles have on gas tax revenue.

One reform that merits consideration is limiting the use of gas tax dollars to transportation projects. Wasteful spending is an issue that has long plagued transportation funding. Bloat, inflated labor costs through prevailing wage laws and project labor agreements, and inefficient bureaucratic agencies often increase the budgets of new infrastructure projects above initial estimates. One area of the new proposal that would move gas tax dollars away from roads is a measure that would also allocate up to $980,000 a month to fund improvements at the Port of Mobile. Although these improvements may be necessary, gas tax dollars should be used on roads, not ports.

As sales of fuel-efficient vehicles continue to expand, motor-fuel tax revenues will decline more rapidly. Alabama must find new and more effective ways to cover the costs of transportation projects, if the state wishes to avoid a fiscal disaster. For instance, the state could privatize roads, establish toll systems, or, in line with what has occurred in several cities across the country, lawmakers could implement 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 their effect on the economy.

23rd Annual Highway Report on the Performance of State Highway Systems
In this report, the Reason Foundation ranks the performance of state highway systems in 11 categories, including spending per mile, pavement conditions, bridges, traffic congestion, and fatality rates.

State Motor Fuel Tax Rates
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel).

GSI Analysis: State Revenue Report—New Taxes Increase Some Revenues, Others Show Weakness
The Garden State Initiative examines several novel New Jersey taxes and their effects on revenue. The author discusses the state’s gasoline tax, New Jersey’s revenue shortfall, and the possible need for additional tax hikes.

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 in world in which more fuel-efficient vehicles are rapidly becoming 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
In this paper from the Tax Foundation, 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 projects.

Research & Commentary: Congestion Traffic Pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under a congestion pricing model, road operators charge a variable price based on congestion, thereby managing demand and limiting congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.

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.

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