Tax Analysts Blog

The Federal Gas Tax Is Old -- and Broken

Posted on Jun 7, 2017

The federal gas tax turns 85 today – pretty respectable for an excise but nothing compared with federal levies on alcohol and tobacco, which first appeared in 1789. 

Still, the gas tax is looking less spry than it once did. As the principal source of revenue for the Highway Trust Fund, the gas tax has an important task to accomplish: ensuring that the nation’s infrastructure keeps pace with a growing economy. But it’s no longer getting the job done. 

Congress hasn’t raised the gas tax in 24 years. In 1993 lawmakers pegged it at 18.4 cents per gallon. Since then, however, construction costs have increased dramatically, speeding the trust fund’s outflow. At the same time, automobile fuel efficiency has also risen, allowing motorists to drive more miles on less gas – and thereby slowing the trust fund’s inflow.

Squeezed from both sides, the trust fund has been chronically short of revenue during the last decade or so. Last year, faced with yet another “crisis,” Congress cobbled together a five-year patch that relied heavily on budgetary legerdemain.  Notably, however, lawmakers declined to take the more obvious route to long-term solvency: raising the gas tax.

Generally speaking, taxes don’t do well when left unattended; they require maintenance and attention, at least once in a while. Left to their own devices, they tend to decay. That’s certainly what happened to the gas tax -- it hasn’t kept pace with changing economic circumstances.

But along the road to gradual inadequacy, the gas tax hit an even bigger speed bump: In 1990 Congress broke the tax when lawmakers raided it for cash.  For most of its modern history, the gas tax has been a more or less straightforward user fee— drivers paid for road construction using a tax that was pretty well correlated with road usage.

In 1990, however, Congress changed the deal. As part of a deficit reduction package, lawmakers and President George H.W. Bush agreed to boost the gas tax from 9.1 cents to 14 cents per gallon. And crucially, they used half the new revenue for deficit reduction, not road construction.

The 1990 switch was a turning point in gas tax history. Yes, it’s true that Congress had previously used gas tax revenue to pay for things other than infrastructure. In fact, the first federal gas tax was itself an “emergency” levy designed to cope with sagging revenues in the early years of the Great Depression.

But since Dwight Eisenhower made the gas tax the fiscal foundation of his new interstate highway system,  the gas tax has been a road tax. And as a road tax, it was well tolerated. As historian Christopher W. Wells has noted,  "The tax was neither onerous nor obvious -- paid a few cents at a time, with the exact amount unadvertised -- and it funded conspicuous, large-scale road construction."

But that was before Congress started meddling with the gas tax. To be sure, the 1990 experiment was short-lived; after another revenue grab in 1993, lawmakers returned the tax to its traditional role. After 1997, it was a road tax again.  But the damage was done.

Today, support for higher gas taxes is not completely absent from the political landscape. Some national polls  suggest that voters are willing to contemplate an increase if the money is devoted to building better roads. But state-level polls are often less encouraging, and most politicians (at least in Washington) seem convinced that any sort of gas tax increase would be political poison. The politicians may be right – as experts in pandering, they’re pretty good at divining the electorate’s short-term preferences.

But someday, lawmakers will be faced with another trust fund “crisis.” And even sooner, they may have to grapple with President Trump’s much-advertised but still undelivered infrastructure plan.

Either way, the gas tax – or something like it, including a miles-driven tax – deserves serious consideration. After all, it worked for a few decades, and it might work for a couple more.

As long as Congress doesn’t muck it up again.

Read Comments (4)

Edmund DantesJun 7, 2017

Two elements missing from your otherwise fine analysis.

First, the gas tax continues to be raided to fund mass transit and amenities such as bike paths. The theory is that such non-road payments will reduce the demand for road use, but as far as I can tell this is simply unmeasured conjecture. I would prefer a clean transportation system in which cars cover their own costs, and mass transit covers its own costs. Taxpayers have grown weary of being told that a tax will be used for one thing, only to see it diverted to something else, even if related.

Perhaps more importantly, states have been very busy raising their gas taxes, even if the feds have not. Hence, gas taxes already consume a remarkably large part of the cost of filling a tank, certainly more than a fair share, approaching a 50% tax rate depending upon the state and the market price of gasoline. In my state of CT the direct and indirect taxes on gasoline are so high that people routinely drive to MA or RI to save money.

I will strongly resist the government tampering with my vehicles so as to measure my road usage. That invasion of privacy is a bridge too far.

AlexJun 8, 2017

Edmund, the idea that cars and mass transit should each "cover their own costs" sounds nice in theory, but seems a lot harder to do in practice.

First, it seems like you tacitly concede that there are negative externalities created by cars, such as congestion and pollution. I suppose I would agree with a system which truly internalizes the externalities of cars, but of course the economic value of the externalities created by cars is a matter for political debate and not something that can be calculated with 100% certainty. You might argue that the current regime more than internalizes the externalities of cars, while I might argue that the current regime barely scratches the surface in this regard.

Second, I think we both know that forcing mass transit to depend solely on the farebox for revenue, as opposed to being subsidized by general purpose taxes and/or gas taxes, would quickly create a death spiral for almost every mass transit system except possibly for New York, San Francisco, Boston, Washington DC, Philadelphia, and Chicago. Yet thousands if not millions of people outside these cities, including myself, cannot drive cars because they either cannot afford one, or they have disabilities that prevent them from driving. We depend on dependable, robust mass transit in order to be able to work. How would you propose allowing the working class and people with disabilities to be able to work that wouldn't ultimately be even less efficient than simply subsidizing mass transit?

Edmund DantesJun 15, 2017

I would balance the externalities in this way. I would use general tax revenues to cover the entire capital cost of building mass transit, but I would require the fare box to cover all of the operating costs, including routine maintenance and retirement benefits (if any) for employees.

If a mass transit project can't even cover its own operating costs, it should be terminated. This is the situation for many of the Amtrak lines outside the Northeast corridor.

Mike55Jun 8, 2017

I also dislike the concept of a miles driven tax. Presumably we should wait until improved fuel efficiency actually decreases gas tax collections prior creating an entirely new bureaucracy, right? To date as cars have become more fuel efficient (not to mention comfortable/reliable) folks have responded by driving more, holding consumption at similar levels. The drop in gas tax receipts is caused by a far less exciting story... it's just what happens when you design a tax that does not self index for inflation.

As for the larger point... I wonder if spending less on infrastructure is a rational response to increased construction costs. The Obama Administration certainly chose that path, diverting the funds advertised as infrastructure stimulus spending to areas like education upon the disheartening discovery that as a society we have indeed somehow lost our capacity to build new infrastructure efficiently. To me makes sense: I appreciate that crumbling bridges are a huge/growing problem, but if we are incapable of building new bridges then perhaps we ought to be using those resources to address our myriad other challenges instead.

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