Research & Commentary: New Jersey’s Gas Tax Failure

Published August 31, 2018

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. The tax swap was intended to provide funds for infrastructure projects in the Garden State.

However, the new tax has not raised the necessary funds for infrastructure projects. This means the tax may increase again. 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 can be adjusted upward to cover the shortfall. Similarly, if there is a revenue surplus, the rate can be lowered. According to the, the tax has not met the baseline and is set to increase 4.3 cents per gallon on October 1.

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.

According to Americans for Prosperity, households with incomes of less than $50,000 per year spend more than 20 percent of their after-tax income on energy. Wendell Cox, principal of Wendell Cox Consultancy, an international public policy firm and Ronald Utt, Senior Research Fellow for the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation, argue gas taxes have a stronger effect on lower- and middle-income families than they do on the wealthy. Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional income per month for an average family, and research shows increasing gas taxes could cause low-income families to drive less, which could reduce employment options.

Additionally, this problem is likely to escalate in the coming years. The Institute for Energy Research estimates that if electric vehicle sales reach 20 percent of all new car sales, federal and state gasoline tax revenues would fall by $3 billion, or about 5 percent. Furthermore, gasoline taxes do not exist in a vacuum; increasing this tax would raise prices on goods and services throughout the economy.

Wasteful spending is an issue that has long plagued transportation funding. Inflated labor costs through prevailing wage laws and inefficient bureaucratic agencies often increase the budgets of new infrastructure projects far above initial estimates. In 2018, the Reason Foundation determined New Jersey’s highway system to be the nation’s most expensive to operate and maintain, and ranked it last in overall cost-effectiveness.

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 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, deficient 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 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
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 improvements.

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.

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 Arianna Wilkerson, Heartland’s government relations coordinator, at [email protected] or 312/377-4000.