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Economic Analysis: Imperfect Gas Tax Is Superior to Repatriation for Highway Funding

Posted on November 1, 2016 by Sullivan, Martin A.

Lowest of the low-hanging fruit on the tree of tax reform is deemed repatriation of foreign earnings of U.S. multinationals at a preferential rate. CEOs and CFOs of many of America's largest multinational corporations want the freedom to move multibillion-dollar pools of profits into the United States without paying full U.S. tax or recognizing full tax expense. Economists like the idea of taxing old capital because it will not adversely affect decisions to make new productivity-enhancing investments. Politicians like the idea of collecting a big chunk of corporate tax revenue that most corporate chieftains are willing to pay.

To make the politics of this approach even sweeter, there is a large chorus proposing that revenues from this one-time tax be earmarked for spending on infrastructure -- spending that has no partisan boundaries. Both President Obama and former House Ways and Means Committee Chair Dave Camp have proposed that revenues from repatriation be used to replenish the Highway Trust Fund.

According to the staff of the Joint Committee on Taxation, the Obama administration proposed a 14 percent tax on existing unrepatriated foreign earnings that would generate $217 billion over 10 years. Camp's proposed 8.75 percent tax on cash or cash equivalents and 3.5 percent tax on all other accumulated foreign earnings would generate $170 billion. (For more on the potential revenue gains and losses from compulsory repatriation, see Chye-Ching Huang, "Three Types of 'Repatriation Tax' on Overseas Profits: Understanding the Differences," Center on Budget and Policy Priorities, Oct. 7, 2016; and JCT, "Testimony of the Staff of the Joint Committee on Taxation Before the Select Revenue Measures Subcommittee of the House Committee on Ways and Means Hearing on the Taxation of the Repatriation of Foreign Earnings as a Funding Mechanism for a Multi-Year Highway Bill," June 24, 2015.) According to the JCT, U.S. corporations' untaxed foreign earnings kept offshore were $2.6 trillion in 2015.

Rep. John Delaney, D-Md., has a plan to tax the stock of unrepatriated foreign earnings at 8.75 percent and use part of the proceeds to capitalize an infrastructure bank with the remainder earmarked for the Highway Trust Fund. Earlier this month, S&P Global released a report that proposed a zero rate on repatriated earnings in exchange for companies committing 15 percent of the returned money to investments in infrastructure bonds issued by state and local governments.

For politicians, the pairing of low-taxed repatriation with infrastructure spending is a match made in heaven. But from an economic perspective, they are an odd couple. There is no policy reason that says rebuilding a bridge in the Midwest should be linked to tax relief on profits booked in Ireland a decade ago. If we did not need more infrastructure, wouldn't we still need to unlock unrepatriated foreign profits? If there were no trapped foreign earnings, wouldn't we still need to increase infrastructure spending? Corporate America is right to ask why it in particular is being asked to foot the bill for road construction when some sort of fee that spreads the cost over all users of our highways is clearly the superior alternative.

Although far from perfect, using taxes on motor fuels to fund highways is a pretty good application of the benefit principle: Those who benefit from roads, as measured by their gas usage, should pay for them. Yes, with the advent of hybrid and electric vehicles, and other methods of improving fuel efficiency, the gas tax has become a far less precise measure of road use, and therefore there has been some slippage in the application of the benefit principle. But using general fund revenues to finance road construction is a complete abandonment of the benefit principle. Matching of costs and benefits improves the efficiency of the economy because it causes users of roads to take into account true costs. In contrast, when Congress taps the general fund to pay for roads (as it has done repeatedly in recent years), it is providing a subsidy to the driving public when, if anything, one would think Congress might want to be doing the opposite in order to reduce carbon emissions and traffic congestion.



Let's look at a few facts that show as a policy matter that upward adjustment of the gas tax should be no big deal even though most politicians, including Obama and our two major-party presidential candidates, won't touch it with a 10-foot pole. One of the more critical flaws with the federal gas tax is that it is not indexed to the price level. Even with the low rates of inflation in recent years, the purchasing power of revenues from a gas tax over time has taken a beating. Figure 1 shows that an 18.4-cent-per-gallon federal gas tax levied in 2016 is equal to an 11.1-cent-per-gallon gas tax levied in 1993, the last time the tax was increased. The purchasing power of the tax revenue collected on each gallon of gasoline consumed has declined by 35 percent. In other words, raising the gas tax by approximately 7.5 cents per gallon would only make it equivalent to the burden of the tax Congress imposed in 1993. In real terms it is not a tax increase; it is just preventing a tax cut.


Figure 1. Cents Per Gallon Gas Tax in 1993 Dollars

Figure 2 shows that price swings for gasoline of $1 per gallon or more over the course of a single year are commonplace. An extra 12 cents per gallon at the pump, as proposed in 2015 by Sens. Bob Corker, R-Tenn., and Christopher Murphy, D-Conn., would hardly be noticed, especially now that the price of gas is considerably below the $3-per-gallon mark that prevailed from the beginning of 2011 through mid-2014.

Figure 2. U.S. Average Retail Price of Gasoline Per Gallon,

The table shows that since 2011, at least 22 states have raised or will soon be raising their gas taxes by a penny a gallon or more. Although most of our federal legislators would rather walk barefoot on broken glass than raise the gas tax, the table shows that raising the gas tax is hardly the end of the world or the end of a political career. For example, in the spring of 2014, New Hampshire Gov. Maggie Hassan (D) signed into law a 4-cent-per-gallon increase. In November of that same year, she defeated her Republican rival 52 percent to 48 percent. And in July 2015, Washington Gov. Jay Inslee (D) signed an 11.9-cent-per-gallon increase. He is now leading his Republican opponent by 10 percentage points in his bid for reelection.

               Federal and State Gasoline Taxes, Cents Per Gallon

               (as of October 1, 2016, except where indicated)
                       State      Other                        Total Change
 Rank   Jurisdiction   Excise     State Tax    Federal  Total  Since 2011

 1      Pennsylvania              0      51.4       18.4     69.8      19.1
 2      Washington             49.4         0       18.4     67.8      11.9
 3      Hawaii                   17      26.6       18.4       62      -2.2
 4      New York                8.1        35       18.4     61.5      -4.2
 5      Michigan*              26.3      13.5       18.4     58.2         2
 6      Connecticut              25      13.3       18.4     56.7      -6.9
 7      California             27.8      10.4       18.4     56.6      -9.5
 8      New Jersey*            33.5         4       18.4     55.9        23
 9      Florida                   4      32.6       18.4       55       2.2
 10     North Carolina           34       0.3       18.4     52.7       1.5
 11     Rhode Island             33         1       18.4     52.4         1
 12     Nevada                   23      10.5       18.4     51.9       0.4
 13     Maryland               25.5         8       18.4     51.9        10
 14     West Virginia          20.5      12.7       18.4     51.6         1
 15     Idaho                    32         1       18.4     51.4         8
 16     Wisconsin              30.9         2       18.4     51.3         0
 17     Illinois                 19      13.7       18.4     51.1     -10.1
 18     Indiana                  18      14.1       18.4     50.5      -5.1
 19     Iowa                   30.7         1       18.4     50.1       9.7
 20     Georgia                  26       5.2       18.4     49.6      10.4
 21     Oregon                   30       1.1       18.4     49.5       0.1
 22     Vermont                12.1      18.4       18.4     48.9       5.5
 23     Maine                    30         0       18.4     48.4        -1
 24     South Dakota             28         2       18.4     48.4         6
 25     Utah                   29.4         0       18.4     47.8       4.9
 26     Minnesota              28.5       0.1       18.4       47       1.4
 27     Ohio                     28         0       18.4     46.4         0
 28     Montana                  27       0.8       18.4     46.2      -0.1
 29     Nebraska               25.8       0.9       18.4     45.1      -0.6
 30     Massachusetts            24       2.5       18.4     44.9         3
 31     Kentucky               24.6       1.4       18.4     44.4       3.5
 32     Kansas                   24         0       18.4     42.4        -1
 33     Wyoming                  23         1       18.4     42.4        10
 34     New Hampshire          22.2       1.6       18.4     42.2       4.2
 35     District of Columbia   23.5         0       18.4     41.9         0
 36     Delaware                 23         0       18.4     41.4         0
 37     North Dakota             23         0       18.4     41.4         0
 38     Virginia               19.9       2.5       18.4     40.8       2.7
 39     Colorado                 22         0       18.4     40.4         0
 40     Arkansas               21.5       0.3       18.4     40.2         0
 41     Tennessee                20       1.4       18.4     39.8         0
 42     Alabama                  16       4.9       18.4     39.3         0
 43     Louisiana                20         0       18.4     38.4         0
 44     Texas                    20         0       18.4     38.4         0
 45     Arizona                  18         1       18.4     37.4         0
 46     New Mexico               17       1.9       18.4     37.3       0.1
 47     Mississippi              18       0.8       18.4     37.2         0
 48     Missouri                 17       0.3       18.4     35.7         0
 49     Oklahoma                 16         1       18.4     35.4         0
 50     South Carolina           16       0.8       18.4     35.2      -0.1
 51     Alaska                    9       3.3       18.4     30.7       4.3

 Sources: 2016 figures are from the American Petroleum Institute website.
 2011 figures are API figures published on the Tax Foundation website. Most
 states with tax declines were automatic declines, in which the rate of tax
 is tied to fuel prices.

 *In November 2015 Gov. Rick Snyder (R) signed legislation that will
 increase Michigan's gas tax by 7.3 cents, to 26.3 cents per gallon on
 January 1, 2017. On October 14, 2006, Gov. Chris Christie (R) signed
 a bill raising New Jersey's gas tax by 23 cents per gallon, which will
 take effect on November 1.


Because of low expectations for Congress, many will consider it a major achievement if taxes on repatriated earnings are used to fund infrastructure. After discussions with Senate Finance Committee ranking minority member Ron Wyden, D-Ore., David Leonhardt of The New York Times reported in its October 18 issue that if the Democrats take control of the Senate, their first priority will be a "big bill" to fund more infrastructure spending and their second priority will be a corporate tax increase to pay for it. Later that same day, Sen. Charles E. Schumer, D-N.Y., the likely majority leader if Democrats take control of the Senate, stated in an interview with John Harwood of CNBC that after immigration reform, he expects there can be bipartisan progress on "some kind of international tax reform tied to a large infrastructure program."

But we should not forget that from an economic perspective, this approach has some serious drawbacks. First, a repatriation tax is a one-time revenue raiser and therefore only a temporary solution. Second, that approach allows Congress to delay the hard work of figuring out a new user fee on motor vehicle use that doesn't depend on gasoline usage but rather on road wear and tear. Some type of vehicle miles tax adjusted for vehicle weight is a long-term solution Congress should be studying now.

With Oregon taking the lead, and with the help of funding from the U.S. Department of Transportation, more than a dozen states are exploring different approaches to imposing fees on road users in lieu of excise taxes on gasoline. In California, participants in a pilot program can choose from four options on how user charges can be levied: (1) a flat fee for road use of a specific period of time; (2) prepayment for a specific number of miles; (3) payments based on periodic odometer readings; and (4) automated mileage reporting using in-vehicle GPS tracking equipment.

The other problem with pairing a low repatriation tax with infrastructure spending is that it would stall political momentum for tax reform. First, it absorbs a huge amount of revenue that could be used (at least temporarily) to reduce the corporate tax rate. Second, such a popular provision with the corporate community works as an engine that would pull many less popular aspects of tax reform through the legislative process. With that engine taken off the table, the already difficult task of building momentum for tax reform would be more problematic than ever.

Better Than Nothing


In addition to fostering unneeded uncertainty, the distracting theatrics of this presidential election have allowed our pressing economic problems to remain largely unaddressed. After November 8 our leaders and the public will no longer have an excuse for delaying the hard work of policy development. Trade, immigration, infrastructure, entitlements, and tax reform will be high on the to-do list.


Unfortunately, the likely electoral outcomes leave us with partisan gridlock that will make lasting progress on any of these issues hard to come by. It is only by comparison to this sorry state of our politics that a repatriation-for-infrastructure approach looks so appealing. It is a slim ray of sunshine in our otherwise cloudy legislative forecast.

But we should not forget that unlocking trapped foreign profits and increased infrastructure spending are goals for their own sakes. And that the pairing of the two is nothing more than clever political maneuvering. While the states are experimenting with alternative long-term solutions, we should raise the federal gas tax for the simple reason that road users should pay for road usage. In December 2010 the Bowles-Simpson commission proposed a 15-cent-per-gallon gas tax increase. It is about time we heeded that commission's advice. Separately, the tax treatment of unrepatriated foreign profits should be a transition rule to a broad-scoped, game-changing international tax reform in which the pernicious lockout effect is permanently eliminated.