The federal gas tax and the future of America’s highways

  • The federal gas tax has not been raised since 1993; since then, inflation has caused its relative purchasing power to decline by 40 percent.
  • Several recent studies call for raising the gas tax to keep up with the cost of maintaining America’s interstate highway system.
  • Proposed reforms includes indexing the gas tax for inflation, switching from a fixed rate to a percentage rate based on fuel prices, and replacing it with a mile-based usage charge.

As Congress transitions into a new year that many experts and commentators already predict will be marked by gridlock, one issue that seems ripe for bipartisan action is infrastructure. President Donald J. Trump has spoken extensively about the issue. He promised in his campaign to invest more than $1 trillion to improve U.S. roads, bridges, airports, and other public works, and earlier this year his administration released a bold infrastructure plan as part of its proposed budget. Congressional Democrats, for their part, have also said that they are open to working with the president on an infrastructure bill, though both sides have yet to find consensus on significant details such as how improvements would be funded.

Central to the federal government’s efforts to maintain America’s infrastructure is the Highway Trust Fund (HTF). Originally created in 1956 to provide a stable funding source for building the interstate highway system, the HTF now funds road construction and maintenance as well as mass transit projects like buses, rail, ferries, and other modes of public transit.

An aging tax and an aging system

According to a recent blog post from the Peter G. Peterson Foundation (PGPF), there’s just one problem with continuing to rely on the HTF to maintain America’s interstate system and support transit systems new and old: it is funded almost entirely (87 percent) by an excise tax on motor and diesel fuel, popularly known as the federal “gas tax.”

Currently the gas tax stands at 18.4 cents a gallon for gasoline and 24.4 cents for diesel, and it has been at this fixed rate since 1993. Since then, the PGPF explains, inflation over the past quarter-century has caused its relative purchasing power to decline by 40 percent. Had it been indexed to inflation, it would have already been raised by 15 cents since 1993, the Congressional Budget Office (CBO) found.

A static tax, coupled with the needs of an aging highway system and rising construction costs, has resulted in recent funding shortfalls for the HTF requiring withdrawals from the general Treasury fund. Looking forward, the situation is poised to get worse as a projected decrease in Americans’ fuel consumption due to better fuel efficiency in automobiles causes revenues to contract. Over the next decade, the CBO projects, the HTF faces a shortfall of nearly $200 billion.

The PGPF lays out several policy options that have been floated to address the impending funding shortfalls:

  • Increase the federal gas tax and index it for inflation. A CBO report found that indexing the gas tax to inflation and raising it by 15 cents per gallon would result in a $237 billion revenue increase over the next 10 years. Such a move would come with political costs, however, because the increase would be felt most acutely by lower-income Americans.
  • Switch the gas tax from a fixed rate to a percentage of the retail price of fuel. This would allow revenues to rise with increases in fuel prices; the obvious downside of this is that if fuel prices fell they would also drag revenues down.
  • Replace the fuel tax with a mileage-based user charge in which drivers pay fees based on the distance driven, regardless of their vehicle’s fuel efficiency. Supporters of this plan argue it is fairer because it charges based on usage rather than the type of automobile on the road. However it would come at a disproportionate cost to rural Americans, who tend to have longer commutes.

Studies call for more funding and upkeep

A report commissioned by Congress and released earlier this month by the National Academies of Sciences, Engineering, and Medicine reaches a similar conclusion to that of the PGPF: the issue is growing more problematic by the year. It found that up to $70 billion per year will be needed over the next two decades to sufficiently upgrade U.S. interstate highways — a figure far higher than the $25 billion the government currently spends.

The report didn’t recommend a specific figure, but it suggested increasing the gas tax and indexing it to inflation. To help readers understand what is at stake, it found that generating an additional $20 billion in annual revenue for the HTF would require raising the gas tax to almost 30 cents a gallon within 10 years, and the diesel levy to about 40 cents.

The last time the debate over raising the federal gasoline tax had any sort of national traction was in 2015, when the federal highway bill called for a study of how to upgrade the highway system. That study found that most of the interstate highway system’s segments are decades old and experiencing heavier traffic than planners expected. As a result, they are going longer without upgrades than originally designed for.

Lawmakers have said little publicly over the past year about the prospect of raising the gas tax. Voters and politicians who oppose such tax increases will need to offer an alternative model of funding America’s highway system, or face the inevitable costs of relying on an aging system stretched beyond its limits.

Alternative solutions

Many conservatives and free market advocates contend that there are in fact other ways to address the issue.

“Spending reforms is the first priority,” said Americans for Prosperity director of policy Akash Chougule in an 2017 interview about gas taxes with the Heartland Institute. “I think that right now the amount folks are paying in gas taxes, there is enough to meet essential repairs and improvements that are badly needed to roads and bridges.”

Chougule said that wasteful spending and red tape in government makes transit projects needlessly expensive and time-consuming. He also blamed “corporate welfare” policies for sapping potential revenue from government coffers. The electric vehicle tax credit, for instance, reduces transportation revenues, he argued, because electric vehicles benefit twice by being exempt from sales taxes and from not paying any gas tax.

As a more equitable, long-term policy solution, he suggested tolling, as well as reforms that would ensure gas tax revenues are directly specifically at maintaining roads and bridges rather than being diverted to mass transit and rail projects.

“We’re going to have to be vigilant and make…lawmakers make tough choices instead of coming back to taxpayers for tax money,” Chougule concluded.

Image Credit: “Legando a LAX” by Roger Schultz is licensed under CC BY 2.0

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