Consistent declines in gas tax revenue have left many states scrambling to fund the maintenance of their critical infrastructure, especially roads and bridges. In New Jersey, legislators have considered several major proposals that would increase the state’s fuel tax in exchange for tax cuts elsewhere, including the state’s estate tax.
New Jersey’s roads and bridges are in dire need of repair, and the funds to cover maintenance are beginning to run dry. In 2013, 66 percent of New Jersey’s roads were in poor or mediocre condition and 36 percent of the state’s bridges were structurally deficient or obsolete, according to the American Society of Civil Engineers. The Reason Foundation found New Jersey’s highway system to be the nation’s most expensive to operate and maintain and ranked it the 48th least cost-effective in the country.
Over the past few years, the New Jersey Legislature has considered increasing the state’s gas tax—currently set at 14.5 cents per gallon. The gas tax has remained unchanged since 1988 and is the second-lowest in the nation. The most recent transportation-funding debate is over a tax swap proposal that would increase the state gasoline tax while eliminating or reducing estate and inheritance levies. Tying these two taxes together is a mistake. Gasoline taxes are becoming increasingly ineffective and should not be considered alongside estate taxes, which require separate reforms.
The proposal currently being considering would increase the state’s motor-fuel tax by 23 cents per gallon. Supporters of the tax predict it could generate about $1.36 billion each year for transportation projects. The tax hike would move New Jersey’s tax rate on gasoline from the second-lowest nationwide to the seventh-highest.
Increasing the gas tax is problematic. In 2015, Daniel Vock, writing for Governing magazine, 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. According to Americans for Prosperity, households with incomes of less than $50,000 per year currently spend more than 20 percent of their after-tax income on energy. Although gas prices are comparatively low today, there are no assurances they will remain this way, whereas the gas tax hike would be permanent.
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 reduce traffic problems.
The second portion of the tax swap would either lower or phase out the state’s estate tax altogether. New Jersey is one of a handful of states that imposes both an estate and inheritance tax. High estate and inheritance tax rates have forced many families to leave New Jersey for more-tax-friendly states. Lowering or eliminating the estate tax is sound tax policy; it would create jobs and promote savings and investment. The estate tax is an example of double taxation and places an undue burden on family-owned businesses and farms.
New Jersey sets its threshold for paying the estate tax lower than any other state in the nation. New Jersey citizens must pay the estate tax beginning at a value of $675,000, which is far below the $5.34 million threshold for federal taxes. Tax rates on inheritances in New Jersey are not much better. The state’s inheritance tax rates can reach 16 percent, among the highest in the country. Several states in the region, including Maryland and New York, have begun efforts to reduce their estate taxes, which means New Jersey would become even less competitive and further encourage high-income citizens to leave the state if they increase estate tax rates.
Given the significant differences between the two taxes, New Jersey legislators should consider the estate tax and the gas tax separately. Estate taxes should be lowered, and gas tax revenues should be devoted entirely to road and bridge construction and maintenance.
The following documents examine gasoline and estate taxes in greater detail.
Alternatives to the Motor Fuel Tax
http://heartland.org/policy-documents/alternatives-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
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 also 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.
Gasoline Fuel Tax Rates as of January 2016
https://www.artba.org/economics/research/gas-tax-history/
The American Road & Transportation Builders Association provides a map documenting state gasoline tax rates, using data from state Departments of Revenue.
State Motor Fuel Taxes: April 2016
http://www.api.org/~/media/Files/Statistics/StateMotorFuel-OnePagers-April-2016.pdf
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
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 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.
The Moral Case Against the Death Tax
http://heartland.org/policy-documents/moral-case-against-death-tax
This Cato Policy Analysis by Edward McCaffery is a primer on the basics of the death tax. McCaffery finds the tax fails to achieve most – and quite possibly any – of the objectives its supporters promote.
How the Death Tax Kills Small Businesses, Communities – and Civil Society
http://heartland.org/policy-documents/how-death-tax-kills-small-businesses-communities-and-civil-society
In this Heritage Foundation Backgrounder, Patrick Fagan argues the death tax is a direct assault on a community’s economy, undermining small businesses – a primary source of sustenance for communities.
Growth Consequences of Estate Tax Reform: Impacts on Small and Family Businesses
https://heartland.org/policy-documents/growth-consequences-estate-tax-reform-impacts-small-and-family-businesses
Douglas Holtz-Eakin and Cameron T. Smith of the American Family Business Foundation examine the effects of a higher estate tax rate on asset accumulation, small and family businesses’ cost of capital, investment outlays, desire to hire, size of payrolls, and jobs. In each instance, raising the estate tax does significant harm.
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
https://heartland.org/policy-documents/raising-gas-taxes-wont-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 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 Logan Elizabeth Pike, Heartland’s 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.
