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Commentary: Why Gas Taxes Aren’t Paying the Bills Anymore: Justin Fox

February 15, 2018, by Justin Fox

(Bloomberg View)

As has been widely noted, the infrastructure spending plan unveiled by the White House this week doesn’t include a lot of federal spending on infrastructure. This is not just a matter of ideology or timidity on the administration’s part. It’s also a reflection of the fact that the biggest source of money for federal infrastructure spending — the motor fuel tax revenue that flows into the Highway Trust Fund — has been shrinking in real terms for almost two decades.

The decline is even more dramatic when measured in terms of gross domestic product.

Why is gas tax revenue — especially federal gas tax revenue — shrinking? One obvious answer is that, in an economy with even modest inflation, it is designed to shrink. Motor fuel taxes in the U.S. are usually set not as percentages, like sales taxes, but as dollar amounts. The federal gas tax has been 18.4 cents a gallon, more or less, since October 1993 (the revenue effect of that year’s increase shows up belatedly in the above charts because for the first few years it was used for deficit reduction instead of transportation). Here’s the federal gasoline excise tax rate expressed as a percentage of the price of a gallon of regular gas, going back to 1947.

A big part of the ups and downs in the above chart has to do with ups and downs in the price of gas, and this volatility is one reason why gas taxes generally aren’t levied as a percentage of the price. Many states switched to percentage taxes during the oil crises of the 1970s and early 1980s, and they came to regret it when gas prices subsequently plummeted. There are ways to structure a gas tax that would increase with overall inflation but not jump around with every gas price move — the Institute on Taxation and Economic Policy lays out the details of one such proposal here, if you’re interested. Also, it is politically possible simply to raise the gas tax, as a majority of states have done in the past four years. President Donald Trump reportedly surprised lawmakers at a meeting Wednesday by saying he would support a whopping 25-cent gas tax increase.

That suggestion has the feel of a spur-of-the-moment trial balloon that could soon deflate, though. And there’s this other, harder-to-fix problem with gas taxes, which is that gasoline consumption seems to have stopped rising.

The pronounced dip in gasoline consumption from 2007 to 2013 was the product of a dip in vehicle miles traveled in the U.S. that for a while had pundits proclaiming that younger Americans had turned away from cars. Since then, driving has rebounded, although on a per-capita basis Americans are still driving less than they did in 2005. Another thing keeping gasoline consumption from rising is improved fuel mileage:

Average fuel efficiency dropped from 2008 to 2011 in part because economic hard times led people to hold on to older cars — the fuel efficiency of new cars and light trucks has generally kept rising. Another issue is when low fuel prices and changing fashions lead Americans to choose pickups and sport utility vehicles over more-fuel-efficient cars. That happened in the 1990s, and it appears to be happening again. This time around, light trucks are subject to tougher fuel-efficiency standards than they were in the 1990s, but those could be relaxed if Republicans maintain control of the White House and Congress for a while.In other words, these trends aren’t inevitable. It is possible to imagine some combination of low gas prices driven by increased U.S. oil production, fuel-efficiency rollbacks, and an extended economic boom driving more fuel-tax revenue into the Highway Trust Fund. But it is also possible to imagine increasing uptake of electric cars actually driving gasoline consumption down, as Amir El-Sibaie of the Tax Foundation did in an analysis published this week:

While the gas tax may be a suitable policy tool now, as there are currently only about 2 million electric vehicles worldwide, new predictive models such as the Bloomberg New Energy Finance (BNEF) forecast predict that comparable electric vehicles may be as cheap as gasoline vehicles by 2025. Additionally, electric vehicle sales are forecast to overtake traditional internal combustion engine vehicle sales by 2038. The market for heavy-duty vehicles is similarly being shaken up by electric vehicles, with recent announcements from Tesla regarding their Tesla Semi causing rival automotive manufacturers to similarly announce plans.

In reality, the gas tax is already falling short as a policy tool — and boosting the tax by 25 cents or some other amount might accelerate its decline by pushing even more buyers toward electric cars. As Robert S. Kirk and William J. Mallett of the Congressional Research Service explain in a January report that was the chief inspiration for this column, Congress has since 2008 been financing transportation spending “by supplementing fuel tax revenues with transfers from the U.S. Treasury general funds.” While I guess there’s no reason in principle why highway funding shouldn’t come from income taxes and other sources, it seems problematic because (1) it entails battling for scarce funds with lots of other government endeavors and (2) it means road users are no longer paying the full cost of building and maintaining the roads they use.

The motor fuels tax isn’t exactly a user fee for drivers. Since 1983, some of it (16 percent currently) has been funneled to public transportation, and the revenue has probably never come close to compensating for the full environmental costs imposed by automobiles. But it has been a reasonably successful and durable means of paying for roads, bridges and other useful transportation infrastructure. Now that it is endangered, one obvious replacement would be a more explicit user fee that charges drivers for driving.

A few years ago, there was a flurry of interest in comprehensive user-fee systems that used global positioning system devices to track every mile that everyone drove. But the Netherlands, which was leading the way in this, backed off because of widespread privacy concerns, and interest elsewhere subsequently faded. Several other European countries do charge large commercial vehicles such as trucks and buses for every mile driven, according to a recent rundown by the Congressional Research Service, and New Zealand has a per-kilometer user fee for both trucks and cars that relies on odometer readings. In the U.S., the main innovation so far has been increased use of tolls, which thanks to transponders and license-plate cameras have become a lot easier to collect.The White House infrastructure plan recommends accelerating this shift to toll roads by giving states much more leeway to charge tolls on interstate highways and reinvest the proceeds in other transportation infrastructure. Senate Minority Leader Chuck Schumer promptly labeled these “Trump tolls” — guessing, probably correctly, that they won’t be popular. Meanwhile, New York Governor Andrew Cuomo’s proposal for a congestion charge on drivers in Manhattan south of 60th Street isn’t exactly meeting with universal acclaim. But with gas tax revenue on the wane, something (or, more to the point, somebody) does have to give.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

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