Research & Commentary: New Jersey Should End Its Automatic Gas Tax Hikes

Published October 18, 2018

New Jersey drivers are now facing yet another increase in the state’s gasoline tax, the second in just two years. In 2016, New Jersey increased its gasoline tax as part of a tax swap compromise that raised the gas tax by 23 cents per gallon in exchange for a sales tax cut, elimination of the estate tax, and increases to the retirement income exclusion and the state’s Earned Income Tax Credit. Contrary to promises made by gas tax proponents, the levy has not raised the necessary funds for infrastructure projects.

As part of the 2016 legislation, $1.16 billion in new revenue must be allocated to the trust fund each year. If revenue is lower than the baseline, the gas tax rate will be adjusted upward to cover the shortfall. Similarly, if there is a revenue surplus, the rate will be lowered. Because of these automatic increases, the state’s gas tax rose by 4.3 cents per gallon in September. The new hike makes New Jersey’s gas tax the fifth-highest in the country, three spots worse than the state’s ranking in 2017.

One of the problems with New Jersey’s gas tax is its volatility; the rate is determined each year using a formula based on gas tax collections from the prior year. This process, commonly known as indexing, may sound fair and efficient, but it has several serious flaws.

First, under such a scheme, policymakers avoid accountability because they don’t have to pass new legislation each time the tax rises. If New Jersey lawmakers want to raise the gas tax, they should be required to vote to increase it, and thus be held responsible for the higher rate.

Second, these policies can be especially detrimental when inflation outpaces wage growth.

Third, as the nonpartisan Americans for Tax Reform (ATR) notes, when gas taxes are tied to the Consumer Price Index, gas tax hikes can contribute to additional tax increases in the future: “So, as the price of gas goes up, this creates upward pressure on the [Consumer Price Index]. In turn, this increases the gas taxes in these states. So citizens in these states are hit even harder by gas price increases.”

A new bill introduced by Assemblyman Jay Webber (R-Parsippany) would end automatic gas tax increases and would instead require a vote in the state’s legislature to increase the gas tax. However, the bill does not completely from the current funding strategy, as it will still include a recommended gas tax hike based on previous prices. (Under the proposed system, the legislature would be able to choose whether to accept the recommended hike.) State Sen. Kip Bateman (R-Neshanic Station) is currently preparing similar legislation in the state’s Senate.

New Jersey legislators should also consider changing its gas tax’s variable rate tax structure. One way to accomplish this would be to institute a flat gas tax rate, which is already used in 32 states. Under such a system, a single, per-gallon flat tax rate is applied, and it can only be changed by a vote in the state’s legislature. This could help stabilize New Jersey’s road fund and leave it less vulnerable to fuel-price fluctuations.

New Jersey must find new and more efficient ways to cover the costs of transportation projects across the state if it wants to avoid budgetary disaster. For instance, New Jersey lawmakers could privatize roads, establish toll systems, or 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 state economies.

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 Taxes: July 2018
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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