Tax Analysts Blog

What To Do With the Gas Tax?

Posted on Jun 12, 2013

There is little doubt that many of the bridges, roads, and highways in this great nation are in disrepair. There is also little doubt that despite improvement in the fiscal situation of most states, it is still difficult for state and local governments to earmark enough revenue to significantly improve transportation infrastructure.

Revenue from gas taxes makes up a significant portion of many state’s transportation funding. The National Conference of State Legislatures reports that gas taxes make up 40 percent of state highway revenue (and nearly 90 percent of federal highway revenue). But gas taxes tend not to be indexed for inflation and have not risen in pace with the cost of construction.

So given that revenue from state and local gas taxes has long been used, at least in part, to pay for transportation-related expenses, one solution for decaying infrastructure is to increase the gas tax and allocate revenue from that increase to needed transportation improvements. It seems like a simple solution, except that it involves raising a tax rate, which is almost never a simple solution.

That said, politicians have found support for the gas tax from environmental groups and even some economists. Arguments have been made that because we import so much foreign oil, taxing the consumption of gasoline helps balance the trade deficit. It has also been argued that a tax on gasoline discourages its use, and a reduction in the use of gasoline may have long term benefits for the environment.

Still, while increasing the gas tax is a frequently cited solution, it is not the only one. On June 7, Iowa Gov. Terry Branstad said that he is looking for alternative methods of paying for improvements to the state’s roads, such as allocating money from a state infrastructure fund or even using sales tax revenue. Speaking on a television program called “Iowa Press,” he acknowledged the dilemma with raising gas taxes. “The public doesn’t want to see the cost of gasoline go up any more. They’ve seen these dramatic spikes and there’s no public support for that,” said Branstad.

This is a relatively new stance for Branstad, who had indicated he would support a 10 cent per gallon increase in the Iowa gas tax. Still, he’s not alone in changing his stance on the gas tax. It is easy to acknowledge that more revenue is needed for infrastructure improvements, but it is difficult to say the gas tax is the most politically expedient way to get that revenue. As noted at the outset, increasing a tax is almost always difficult, and as people go to gas stations to fill up before heading to the beach, there is the potential for outrage at the pump.

So what is a state (or locality) to do? Roads and bridges need to be maintained, and that costs money. Yet in addition to the difficulty of raising the gas tax, more and more consumers are choosing hybrid or fuel efficient cars. Sales of hybrid cars skyrocketed in the past year. Toyota reported a 73 percent increase in 2012 over the previous year, while General Motors reported a 50 percent increase.

In response, and to compensate for the loss of gas tax revenue, a few states are looking into assessing a tax (or fee) on hybrid cars. Virginia is one such state. Virginia will soon charge owners of hybrid or other “green” cars a $64 per year fee to make up for lost gas tax revenue. It’s certainly not a hefty assessment, but it is a disincentive to purchase a green car.

So what’s the solution? Do we increase the gas tax and require those that use the most gas to pay for roads? Or do we require hybrid car owners to pay an annual fee or assess a per mile tax? Or perhaps both. I don’t know the answer, but I am going to go out on a limb and suggest that states (and the federal government for that matter) should figure out how much money they need and pick an option that imposes the burden on the broadest section of the population. States, like the federal government, need to stop using taxes to incentivize or de-incentivize certain behaviors. That almost never translates into good tax policy.

Read Comments (1)

edmund dantesJun 13, 2013

Politicians love to claim that they are earmarking revenue from specific taxes
for specific spending to gain political support for the measure. The reality
is, it rarely happens, the money goes into the general fund and transportation
needs have to compete with other constituencies for funding. What's more, very
substantial amounts of gas tax revenue is already being diverted away from
roads and bridges, and into mass transportation and other things only
tangentially related to cars.

Another reality is that the government already makes more money from the sale
of gasoline than the oil companies do.

I believe that if we spent 100% of gas taxes on roads and bridges, we'd have
plenty of funds for the job at current tax rates. I'd like to see a study that
proves otherwise. I'd also like to understand why roads and bridges cost so
much more than they used to cost.

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