Should Fuel Taxes Be Raised?

Do you think the taxes you pay are too low? Not many of you are likely to say “Yes” to that question, but a new study might change your mind at least in one area: state fuel taxes. A new analysis from the Institute on Taxation and Economic Policy (ITEP), a nonprofit that examines the implications of United States tax policy, says that state governments are losing out on more than $10 billion in transportation-related revenue each year. Critics might say that keeping that money away from bumbling governmental spenders is a good thing, but since the money raised by gas taxes would typically go directly to improving roads and related infrastructure, consumers and commerce might well be suffering from this revenue shortfall. The ITEP report suggests that the lost fuel tax revenue results in an estimated $130 billion drain on the economy resulting from higher vehicle repair costs and travel-time delays.

The organization says that state lawmakers who are understandably reluctant to raise gasoline taxes have cost their states, on average, $201 million in annual revenues by not pegging gasoline taxes to inflation. These losses are accompanied by the declining value of the current federal gas tax, which also supports state transportation projects. It has not been raised since 1993 and it has lost 41 percent of its value because of inflation over that time timespan.

“Unfortunately, many politicians won’t consider touching the gas tax,” says Carl Davis, senior analyst at ITEP and author of the study. “They are raising sales taxes, fees on vehicles, tolls on roads, even looting education funds, all to make up for the stagnant gas tax. But they can’t bring themselves to modernize the biggest source of transportation revenue that’s actually under their control. It makes no sense.”

The report “Building a Better Gas Tax” shows that the average state has not increased its gasoline tax rate in more than a decade, and 14 states have gone 20 years or longer without an increase. One has to believe that citizens of those states have reasons to be happy about that, but while state gas taxes remain flat, the cost of paving roads and building bridges has risen markedly, often at a rate higher than general inflation.

“It’s basic math,” says Davis. “The road repairs you could buy in 1990 with 20 cents, for example, are going to cost 34 cents today. But we still see some states collecting the same flat 20-cent tax that they did back in 1990. That’s the definition of unsustainable.”

After adjusting for construction cost growth and general inflation, the average state’s effective gasoline tax rate is down by 20 percent, or 6.8 cents per gallon, since the last time it was raised. The effective rate of taxes on diesel fuel is off by 18 percent, or 6.0 cents per gallon. Note that the taxes haven’t been lowered; they simply have not been raised to keep up with inflation.

Today’s state gas taxes make up a smaller portion of family budgets than at any time since the tax was first widely instituted in the 1920s, the study says. So should we raise gasoline taxes? That is the thorny issue. A 10-cent-per-gallon increase would cost today’s average driver $4.31 per month, and the 6.8-cent-per-gallon increase needed in the average state would cost the average driver $2.93 per month, according to the report. But the report also acknowledges that a gasoline tax is regressive, that is, it has a disproportionate effect on low-income families, who often use as much gasoline as high-income families.

“Building a Better Gas Tax” offers three specific policy recommendations for modernizing -- and increasing -- state gasoline taxes. They are:

1.    Increase gas tax rates to reverse their long-term declines; the “appropriate rate” of increase desired varies by state.

2.    Peg gas tax to grow alongside the cost of transportation construction projects.

3.    Create or enhance targeted tax credits for low-income families to offset the impact of gas tax increases.

Will the proposal fly? In these days of economic malaise, often made worse by high taxes, onerous regulations, and red tape, it might struggle for air. But as consumers and businessmen alike see the country’s roads and bridges crumble, it might well gain traction.