Two weeks ago, the Senate passed and Obama signed a bill that extends the funding for the Highway Trust Fund until October 30th, 2015. The bill pays for the extension with a number of administrative changes to current 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. es such as 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. . Lawmakers believe that this three-month extension will give them time to find a more long-term solution to the trust fund.
Last week, one possible long-term solution was introduced by Senator Tom Carper (D-DE). The Senator introduced a bill that would increase the federal 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. to about 30 cents per gallon and the diesel tax to 40 cents per gallon by 2019 and adjust them 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 addition, this plan would expand both the Earned 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. and the Child Tax Credit.
Back in February, we modeled a very similar plan to this: raise the gas tax to $0.28 per gallon, adjust it for inflation going forward, and increase the earned income tax credit by $15 billion each year. The $0.28 gas tax would completely fund the highway trust fund in the next decade with a small negative impact on the economy (0.1 percent reduction in GDP). We found that a straight gas tax increase would disproportionate impact low- and middle-income tax payers, who spend more on gasoline as a percent of their income.
Paired with an EITC expansion, however, a gas tax increase becomes distributionally progressive: low-income taxpayers receive a net tax cut while middle and upper-income taxpayers receive a slight tax increase.
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Table 1. Distributional Impact of Gas Tax Increase with Select Offsets Percent Change in After-Tax AGI |
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Income Percentile: |
Bottom Quintile |
Second Quintile |
Middle Quintile |
Fourth Quintile |
Top Quintile |
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A Gas Tax Increase Alone: |
-1.29% |
-0.63% |
-0.51% |
-0.38% |
-0.25% |
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With: |
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2 Percentage Point cut in Capital Gains Tax Rate |
-0.71% |
0.00% |
0.14% |
0.24% |
0.57% |
|
2 Percentage Point cut in Top Marginal Tax Rate |
-1.14% |
-0.47% |
-0.34% |
-0.22% |
0.19% |
|
$1000 Increase in Standard Deduction |
-1.17% |
0.23% |
0.27% |
0.11% |
-0.06% |
|
1 Percentage Point cut in Bottom Marginal Tax Rate |
-1.27% |
0.00% |
0.13% |
0.07% |
-0.06% |
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Expansion of EITC |
0.70% |
1.03% |
-0.18% |
-0.24% |
-0.24% |
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Source: Tax Foundation’s Taxes and Growth Model Note: Gas tax modeled is approximately $168 billion over the next decade. Numbers represent the change in after-tax income from what it would have been in the absence of each tax change. For example, taxpayers in the top quintile have 0.25% lower after-tax incomes over the long run than they otherwise would have in the absence of the tax change. |
The Highway Trust Fund is a government program that largely adheres to the benefit principle by matching cost (gas tax) with benefits (improved roads). This structure should remain. However, a straight gas tax increase would have a slight impact on economic growth, disproportionately tax the bottom two quintiles of income earners, and have political implications. To address these concerns, any increase in the gas tax could be offset by a tax cut of an equal dollar amount. An increase in the gas tax paired with an EITC expansion is a reasonable way to accomplish this.
Read more about the Highway Trust Fund Here.
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