Inflation Indexing the Federal Gas Tax

October 24, 2013

Linking fees or taxes paid to the amount of use taxpayers derive from a resource or service is generally good tax policy. An excellent example of this is funding road maintenance using money collected from tolls or gas taxes. Largely, the more people drive, the more taxes they pay on gasoline and the more tolls they drive through. However, the reliance on gas taxes at the state and federal level has been waning; the last time the federal government increased the gas tax in the U.S. was in 1993 to 18.4 cents per gallon.

Lately this decades-old rate has led to shortfalls in highway funds which the government have been forced to cover with unrelated funds. The Economist recently published an article on the declining amount of highway tax revenue the federal government is pulling in every year; they cite one of our recent reports which shows that nationwide, only about half of road costs are paid through user fees. One of the reasons they attribute to the declining revenue is gas taxes not indexed to inflation. Former Secretary of Transportation Ray LaHood recently said raising the tax by 10 cents and indexing it to inflation would help solve the problem of the funding gaps. Given inflation since 1993 this proposal would closely match the 1993 rate if it would have been indexed to the CPI.

In the near future as fuel efficiency improves and people with electric cars stop purchasing fuel all together alternative methods of raising taxes such as additional tolls or a VMT (vehicle miles traveled) tax could be desirable, but in current circumstances this proposal of increasing the gas tax would go a long way to close the current highway budget gap. Maybe Republicans could use this “tax increase” as a bargaining chip in budget negotiations to avoid income tax hikes—it’s one of the less damaging tax hikes in the revenue toolkit.

For a thorough breakdown of where state and local governments get their road funds for click here.

Also, check out Joseph Thorndike of Tax Analysts discussing gas taxes in Forbes today.

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