Federal and state gas taxes in their current form—excise taxes per gallon of fuel sold at the retail level—may have outlived their usefulness as a transportation funding source. There are two fundamental problems. First, they have not kept up with inflation. Second, as vehicle fuel efficiency has increased, tax revenues have declined; this problem will worsen in the future with ramp-ups in corporate average fuel economy (CAFE) standards.
At 18.4 cents per gallon, the federal tax has been unchanged since 1993. Allowing for 20 years of inflation, it is equivalent to roughly 11 cents today. An ad valorem tax—a percentage of gasoline sales—would be one way to solve this problem. A few states have added ad valorem taxes to their excise tax and/or applied their general state sales tax to gasoline. Another option is to index the tax to inflation; Florida does that and with legislation just passed in Maryland, that state will do so too.
But these changes would not fix the second problem. From 1990 to 2010, the CAFE standard was set at 27.5 miles per gallon (mpg). In 2017, the standard will be about 40 mpg and by 2025, 55 mpg. So a new car driven 14,000 miles per year used to yield the government about $94 in annual tax revenues, but in 2025, it will generate only $47, about half as much.
Meanwhile, much of the nation’s road infrastructure is badly in need of repairs, upgrades and expansions. If current gas taxes aren’t doing the job, what should we do?
Some experts have suggested shifting the per gallon tax to a per mile tax. ... But there are hurdles to implementation and some experts have estimated it would take 10-15 years to fully switch from a per-gallon to a per-mile tax.
I believe it’s time to think outside the box of user fees. User fees are efficient when we want to ration use, such as when roads are congested, but not necessarily on rural roads or at times of day when traffic is free-flowing. Also, we might want user fees to internalize the costs of road wear and tear, but heavy trucks (and weather) are most responsible for road damage, not light-duty vehicles. For transportation financing, I think it might be time to consider a more broad-based tax. Using general sales taxes, as some states are doing, is one approach. Taxing oil rather than gasoline is another idea. Increased vehicle registration fees are also worth considering. And governments may want to make more use of the private sector in public-private partnerships and innovative contractual arrangements.
Personally, I’m not sure what’s best or that there is a single best approach, but the states might be setting us up for some useful natural experiments. After years of stagnation, some states are moving to act. Some have recently raised their excise tax rates, while others have indexed their taxes to inflation, and still others, like Virginia, have moved toward a combination of sales taxes and registration fees and away from the excise tax approach. Still more are in the process right now of considering changes. Letting the states act as laboratories—accompanied by rigorous analysis of the outcomes—might be a good first step.
*With apologies to the Talking Heads.
Hat tip: Common Resources