In his first State of the State address, Maryland Gov. Larry Hogan (R) proposed repealing a provision in a 2013 law tying the state’s primary gasoline tax to the Consumer Price Index (CPI). The law currently allows the gas tax rate to change yearly by up to 8 percent of the tax rate imposed in the previous year.
Maryland’s state gasoline tax rate of 23.9 cents per gallon is above the national average of 20.64 cents per gallon and higher than those imposed by regional neighbors Delaware, New Jersey, and Virginia. States in the Mid-Atlantic region charge the second-highest average level of total state gas taxes at 36.68 cents per gallon, trailing only the West region at 39.60 cents per gallon.
In a report from the Maryland Public Policy Institute, Wendell Cox and Ronald Utt say the gas-tax law is a regressive tax hike that has a stronger effect on lower- and middle-income families than it does on the wealthy. The tax could also cause low-income families to drive less, which could reduce employment options.
Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional spendable income per month for an average family, which means the recent nationwide drop in gas prices could potentially lead to an additional $100 billion of economic growth.
Critics of gas-tax indexing, including the nonpartisan Americans for Tax Reform (ATR), argue automatic increases make politicians and regulators less accountable for gas-tax hikes and creates a bad feedback loop as a result of the price of gasoline being 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 noted.
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.
Hogan’s efforts to improve transparency and remove the indexing requirement is a step toward improving transportation funding, but more work needs to be done. As the rise in fuel efficiency continues, motor-fuel tax revenues will continue to decline. States and the federal government will have to explore more modern and efficient ways to fund road construction and traffic infrastructure. These 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.
The following articles examine how motor-fuel taxes are applied and their economic effects from multiple perspectives.
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, which were spent on transit instead of roads. Cox and Utt also 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://www.americansfortaxreformfoundation.org/tying-gas-tax-inflation-good-idea-a15
Kyle Pomerleau of Americans for Tax Reform (ATR) discusses the efforts made by some states to tie gasoline-tax rates to inflation. ATR argues indexing gasoline taxes removes accountability and will increase gas prices considerably as oil prices increase.
State Motor Fuel Taxes: January 2015
http://www.api.org/~/media/files/statistics/state-motor-fuel-excise-tax-update-jan-2015.pdf
The American Petroleum Institute documents the current motor-fuel taxes (both gasoline and diesel) of each state.
Alternatives to the Motor Fuel Tax
http://heartland.org/policy-documents/alternatives-motor-fuel-tax
This report, submitted to the Oregon Department of Transportation, from the Center for Urban Studies at Portland State University evaluates potential alternatives to motor-fuel taxes. 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. They report on the economic effects of road pricing as a substitute for fuel taxes.
Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-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.
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 created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of that 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 should provide.
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 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
http://news.heartland.org/newspaper-article/2013/02/08/fuel-taxes-tolls-pay-only-one-third-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
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 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 Environment & Climate News website at http://news.heartland.org/energy-and-environment, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
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.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
