December 18, 2018

The gas tax has not been raised in 25 years, and America’s infrastructure network is suffering the consequences. The tax was last raised in 1993 from 14.1 cents to 18.4 cents per gallon, where it remains today. Because the gas tax is not pegged to inflation, its purchasing power has eroded significantly over the past two and a half decades, and the tax is now “worth” 40 percent less than in 1993; the Congressional Budget Office (CBO) notes that if the tax had been indexed for inflation each year since 1993, it would be approximately 15 cents higher in 2019. The decline in purchasing power has important implications for the federal budget and our nation’s infrastructure, and has led some to call for a new effort to address the gas tax.

The real purchasing power of the federal gas tax has declined by over 40 percent since 1993

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The term “gas tax” refers to an excise tax on motor and diesel fuel that funds roughly 85 to 90 percent of the Highway Trust Fund’s revenues, which then go towards road construction and maintenance as well as other capital projects related to transportation. Prices for gas in the U.S. are very low relative to other developed countries — in large part because taxes are lower here compared to other countries, many of whom levy both a value added tax and a separate duty on fuel. For example, a car owner in Germany in 2017 paid an average of $5.87 per gallon of fuel, while their American counterpart paid an average of just $2.79 per gallon. Taxes in Germany and other European countries can account for up to 2/3 of the price of fuel in those countries. In fact, the recent Yellow Vest protests in France were triggered in part by a proposed increase in the tax on diesel fuel.

Taxes on gasoline in the United States are well below those of other countries

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Rising construction costs and the growing needs of an aging highway system have placed a greater strain on the Highway Trust Fund. Additionally, increased fuel efficiency in motor vehicles and projected decreases in motor fuel consumption by Americans have both put downward pressure on revenues coming into the fund. This has led to consistent funding shortfalls in recent years, and looking ahead the problem will only get worse, with an expected shortfall of nearly $200 billion over the next decade.

The transit and highway accounts are projected to face a shortfall of $192 billion over the next decade

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Funding shortfalls in the Highway Trust Fund are typically filled by transfers from the Treasury’s general fund. These transfers do not bring in any new federal revenues, but they allow spending from the fund to continue.

Federal funding for transportation infrastructure usually targets large or complex projects, which often have regional or national impact. To address localized infrastructure needs, many states have implemented their own fuel taxes that are pegged to inflation, but the fixed federal gas tax has meant gradually less federal funding assistance (in inflation-adjusted terms) for states to undertake infrastructure projects. Simply put, there are more needs identified than there are dollars available.

With huge funding shortfalls on the horizon, a number of policy options have been floated:

  • Increase the federal gas tax and index it for inflation. A joint report from December 2018 from the National Academies of Sciences, Engineering, and Medicine and the Transportation Research Board supported this option. CBO notes that increasing the federal fuel tax by just a penny would provide the trust fund between $1.5 billion and $1.7 billion per year. In its recent compendium of options for reducing the deficit, CBO reports that raising the gas tax by 15 cents per gallon and indexing it to inflation each year would increase revenues by $237 billion over the next 10 years. However, the gas tax is applied at the same rate regardless of income; therefore, an increase would have a larger effect on lower-income Americans and would likely face stiff political opposition.
  • Switch the gas tax from a fixed rate to a percentage of the retail price of fuel so that revenues would rise with increases in fuel prices; of course, the inverse is also true and revenues could fall with decreases in fuel prices.
  • 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. Proponents see this plan as an eco-friendly option that would charge based on usage rather than the type of automobile using the roads; critics fear that the plan would disproportionately affect rural Americans who tend to live further from where they work.

As highlighted by the joint report from the National Academies of Sciences, Engineering, and Medicine and the Transportation Research Board, America’s infrastructure needs are profound and growing — and they threaten our economic future. Major challenges include meeting the growing demand on urban components of the Interstate Highway system, ensuring that the system is adaptable to changing vehicle technologies, and incorporating future climate conditions into planning.

As the purchasing power of revenues raised by the gas tax decreases, so too does the government’s ability to build and maintain essential infrastructure projects like bridges, tunnels, and highways. Unless and until the gas tax is increased or amended, annual funding shortfalls will persist and worsen, hampering our ability to undertake critical investments in our infrastructure.


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