Tax Analysts Blog

Gas Tax Follies

Posted on Apr 3, 2013

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.

Read Comments (3)

Carl DavisApr 2, 2013

Gas is taxed at the wholesale level because doing so is much better from an
administrative/enforcement perspective than requiring each gas station to
collect the tax. Moving the point of taxation "upstream" was one of the main
strategies implemented to fight rampant fuel tax evasion in the 1980's (it was
part of the Tax Reform Act of '86).

That said, I am supportive of efforts to make the gas tax more transparent.
Done the right way, it might help drivers realize that the gas tax is not to
blame for rising gas prices these past 10+ years.

RE: taxing gas based on its price, you're right that it can introduce
volatility into transportation funding. But Maryland's reform at least
partially addresses this problem by limiting changes in the tax rate to 8% in
any given year.

Even better than price-based gas taxes, though, is tying the gas tax directly
to inflation. Transportation construction costs have generally tracked the
overall inflation rate quite well in the long-term (recent construction bubble
aside). Indexing the gas tax is a forward-looking policy that creates a
sensible connection between the gas tax and the infrastructure it pays for.
It’s better than an unsustainable Band-Aid fix like just hiking the flat rate.
We already index our income tax brackets, deductions, exemptions, the AMT, etc,
to inflation… why not the gas tax as well?

kurt kramerApr 5, 2013

At some point the nation’s leaders are going to accept the following simple
formula (killing two birds at once) for combating the twin dragons of rising
sea level (which is devastating our tunnels and shore line) and the
unemployment morass and lack of economic growth in our current liquidity trap.

Proposed: LOWER by as much as 6% THE COST TO BUSINESS OF ALL LABOR IN THE U.S.
by replacing and covering (dollar for dollar) the employer contribution to
Social Security with an energy tax on carbon dioxide emissions. The net tax
cost to society would be zero, with the significant promise of a needed upward
correction in GDP and employment and consumer consumption growth and a 6%
competitive improvement in the cost of American labor in the world market.

With fossil fuel consumption in the $2 trillion range and the employer Social
Security contribution in the half trillion dollar range, a 25% annual levy on
fossil fuels would suffice. The cost of the tax to society will undoubtedly be
offset by the increasing supply of cheap natural gas now coming on line.

This would provide an economic umbrella that would spur a bonanza of growth and
invention in the non polluting energy realm. We desperately need a “Fix the
Growth” movement now, which will automatically and permanently “Fix the Debt”
very promptly. It’s simple.

edmund dantesApr 8, 2013

Is there an actual example of a state that dedicates all gas tax receipts to
road repair? So far as I am aware, it all goes into the general fund. Road
repair then has to compete with everything else for funding.

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