Happy Birthday, Gas Tax!

It's been a while since I've ranted about a regular topic: the federal fuel tax. Time to bust out another "boost the gas tax" blog because on this day 20 years ago the gas tax rose from from 14.1 cents to 18.4 cents — and it’s stayed flat ever since then. Certainly a lot has changed since then, and prices for everything have gone up -- including gasoline. Back in 1993 pump prices averaged $1.09 in the U.S. A gallon of gasoline is now averaging $3.50.

Without a doubt, the cost of building and maintaining our roads, rails and bridges has also skyrocketed. So it should come as no surprise that revenues collected at gas pumps to pay for our nation's transportation system now fall woefully short of our needs. In fact, without new revenues, the Highway Trust Fund faces a 100 percent cut in FY2015.

So why hasn't Congress bothered to raise the gas tax in the past 20 years to keep up with transportation costs? After all, since first enacted under President Hoover in 1932 -- at a rate of 1 cent per gallon (the equivalent of about 17 cents per gallon today) -- the federal fuel tax has steadily increased. (Here's a handy year-by-year chart of gas tax rates.) When I was born in October 1969 the rate was 4 cents per gallon; by the early 1980's it was 9 cents per gallon; in the early 90's it bumped to 14 cents per gallon; and then after 1993's jump to a few pennies more...well...no more increase at all.

What changed? Well, in the wake of President George H.W. Bush's "read my lips" snafu the notion of taxes took on a toxic stench in the world of politics. Nowadays, taxes of any sort are generally viewed with disdain by most politicians and a majority of the American people. Add to that the rising cost of gasoline and there you have it: gas taxes are high enough!

But you get what you pay for -- and also what you don't pay for too. Our country's highways system is over 60 years old and in need of replacement. Thousands of bridges are in dire shape. The rail system and our ports also need major overhaul. And public transportation is in need of expansion to keep up with rising demand.

According to a new report by the Institute of Taxation and Economic Policy, the obsolete gas tax has cost our country $215 billion while undermining infrastructure and adding to the deficit. The report also offers these fun facts about the gas tax:

• The gas tax is the single most important source of transportation funding for the federal government -- raising over $30 billion per year (or 85 percent of the revenue flowing into the nation’s transportation spending account).
• Gas tax revenues are on an unsustainable course, with Congress over the past five years transferring more than $53 billion from the general fund to the transportation fund in order to compensate for lagging gas tax revenues.
• By 2015, the transportation fund will be insolvent unless an additional $15 billion transfer is made. Larger transfers will be needed in subsequent years.
• Over three-fourths (78 percent) of the current gasoline tax revenue shortfall is a result of Congress’ failure to plan for inevitable growth in the cost of building and maintaining the nation’s infrastructure. The remainder (22 percent) is due to improvements in vehicle fuel-efficiency. In other words, construction cost growth has been 3.5 times more important than fuel-efficiency gains in eroding the purchasing power of the gas tax.
• This current gas tax revenue shortfall could have been prevented if the tax was better designed. Currently, the gas tax is levied as a fixed amount per gallon sold: 18.4 cents per gallon. A well-designed “variable-rate” tax structure, however, that rises each year alongside construction cost inflation and fuel-efficiency growth would have brought the nation’s transportation account from frequent deficits to surpluses in every year. This reform would have raised a total of $215 billion in revenue to build and maintain America’s infrastructure—including $19 billion in 2013 alone—if it had been enacted in 1997.
• The cost of this reform for the average driver would have been fairly modest. The gas tax rate today would be 29 cents per gallon—or 10.6 cents higher than where it currently stands. This increase would have been phased-in gradually, with the tax rate increase in most years amounting to less than 1 cent per gallon. That 10.6 cent tax increase would cost the average driver $4.66 per month in 2013.
• Such a reform is not without precedent. Congress has already recognized the importance of planning for inflation in other areas of the tax code—most of the nation’s income tax brackets, exemptions, deductions, and credits currently rise with inflation every year. Moreover, a majority of the country’s population already lives in a state that levies a “variable-rate” state gas tax, where the tax rate automatically rises on a regular basis.
• Despite the merits of raising the gas tax, the disproportionate impact of the gas tax on low-income Americans is a real problem. But holding down the gas tax rate is an ineffective tool for preserving the progressivity of the U.S. tax code. Personal income tax provisions like the Earned Income Tax Credit (EITC) are far more helpful to low-income families than a low gas tax rate, and enhancements of such credits can be paired with gas tax reform to offset the regressive impact of the gas tax.