Many states are rethinking how they pay for transportation in general and how they tax gasoline in particular. Maryland is the latest state to pass legislation (HB 1515) dramatically changing the look of transportation finance. Gov. Martin O'Malley (D), who isn’t known for promoting good tax policy, will sign the legislation. But he shouldn't.
The Maryland bill would impose a sales tax on gasoline at the wholesale level. The new law would also index the gasoline excise tax to inflation. Both those approaches represent terrible tax policy. The gas tax is an excise tax that has traditionally funded road and highway maintenance. The logic of it is that drivers pay for the government's upkeep of the road system. In essence, the tax acts like a user fee, albeit an imperfect one.
There are problems with the gas tax. As with all excise taxes, the revenue from it can increase only by raising the rate -- something politicians are wary of doing -- or by increasing usage of the product. Rates have not changed much nationwide over the past two decades. And gasoline usage per capita is falling across the nation. People are driving more fuel-efficient cars. The conundrum for the states is that the roads still need to be repaired, expanded, and improved. But the approach taken by Maryland, and Virginia earlier this year, is not the way to proceed.
First, imposing a sales tax at the wholesale level is disingenuous. Wholesale taxes are designed to hide the burdens. Consumers have almost no way of knowing how much tax they're paying. That lack of salience is terrible policy -- and something often championed by those who can't justify their spending. If the people want more money for roads, they should be willing to provide it with visible higher taxes. Second, the sales tax will make transportation funding less stable. Because the tax is tied to the value of gasoline, it will be subject to great fluctuations. When gas prices spike, there will be much more revenue. When gas prices fall, the state will find itself short. But those fluctuations will be unrelated to the costs of the roads. That disconnect is dangerous.
Indexing a gas excise tax to inflation, a method used in a few states, is also poor transportation finance policy. Politicians should have to explain to the citizens why their tax burden is increasing. And the tax burden should go up when the costs of running the road system go up. Like using the sales tax, indexing the excise tax creates a disconnect between the actual costs of the roads and the revenue being collected. No politician can justify that kind of policy.
Moreover, indexing the excise tax to the consumer price index, as Maryland wants to do, creates a perverse outcome. The price of gasoline is included in the calculation of the CPI. So as the price of gas goes up, the CPI tends to go up. As the CPI goes up, the excise tax goes up.
What states should do when they need more money for transportation is raise the gasoline tax rates. Political leaders should be able to explain the need for more funding and the relationship between driving and highway maintenance and improvements. Given increased fuel efficiency, states should consider adopting mileage taxes, more toll roads, and other ways of explicitly tying the use of the roads to the costs of their maintenance. That would be an honest approach to transportation finance.