Yesterday we wrote about a proposal from Representative Tom Rice (R-SC) that would raise the gas taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. by 10 cents and adjust it for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. going forward in order to close Highway Trust Fund’s ongoing deficits. The plan would also not raise taxes on net by offering a $133 per-person income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. . Although it is a reasonable way to fix the Trust Fund’s shortfall, it faces political difficulties.
The House Republicans have introduced another plan, but a more temporary one. This proposal would raise $8 billion in additional revenue by extending the TSA fee for airline passengers and by changing a few rules related to the Estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. .
This proposal would keep the Highway Trust Fund from depleting its reserves on July 31st, but would only provide temporary relief. If this passes, the Highway Trust Fund would still deplete its reserves next year absent any intervention from Congress.
Ways and Means Chairman Paul Ryan (R-WI) stated that this proposal is meant to be temporary to provide lawmakers time to devise a long-term solution for the Highway Trust Fund.
When lawmakers start looking at a long-term solution for the Highway Trust Fund, they should avoid considering unsound tax policy such as taxing multinational corporations’ offshore earnings to fund the Highway Trust Fund. Instead, they should pursue permanent policy that conforms to the benefit principle of taxation on which the Trust Fund is based. This principle states that the taxes one pays to the government should be connected to the benefits one receives. This principle is seen as an equitable way to finance government projects—in this case, roads and infrastructure.
One option is to increase the gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. , adjust it to inflation, and offset that increase by reducing another tax by the same amount of revenue. There are good policy reasons to raise more revenue from the gas tax in exchange for lowering the revenue received from other taxes.
- The gas tax is a relatively less distortive tax. The gas tax is an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. , which falls mostly on consumption, assuming businesses can pass the tax onto consumers. Consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es do not significantly impact the economy or reduce the incentive to invest. Comparatively, the capital gains income tax falls squarely on capital and thus has a significant negative effect on the economy. Lowering more distortive taxes and raising the same amount of revenue from non-distortive taxes would lead to a larger economy.
- The gas tax conforms to the benefit principle more closely than other taxes levied by the federal government. Although not perfect, the gas tax is better aligned with related government spending than, for example, the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , which is not associated with any specific benefit. Lowering taxes that do not conform to the benefit principle of taxation and raising the gas tax is an opportunity to connect government revenue to related expenditures.
- Closing the funding gap in the Highway Trust Fund would grant lawmakers additional time to focus on other priorities. Rather than trying to search for the next temporary fix for the trust fund, lawmakers could focus on bigger questions: to what extent should the federal government be involved in infrastructure spending? How much should the federal government spend? What alternative funding mechanisms for the trust fund would best ensure its long-term solvency?