Revenue for Road Repairs

Raise it or reform it: Is it time for states to rethink the gas tax?
by , | December 12, 2011
 

commute to work is a bit on the bumpy side, then you know the answer is road repairs. The follow up question is: Given how long this downturn has afflicted state and local budgets, who's going to pay to repair potholes and the like?

Well, it's not going to be the feds. The Highway Trust Fund, which finances an average 45 percent of a state's highway and transit capital costs, is shrinking. One reason for that shrinkage is that the federal gas tax has been stuck at its current rate (18.4 cents per gallon) since 1993, which means it is not keeping up with inflation, to say nothing of state needs. Congress is not likely to raise the federal gas tax rate this year or next, so that leaves the states. In theory, they have a little room to raise or tinker with their gas tax formula -- something most states have not done in years.

Given the importance of a healthy road system to economic development, what approaches could states take to raise revenue for road repair and building? I put that question to Mark Robyn, an economist with the Tax Foundation. Here's an edited version of our conversation:

Is this a good time for states to raise their motor fuel taxes?

It's difficult to raise most taxes. The gas tax -- an excise tax -- is interesting because it's one of the few that states levy that really looks like a user fee. You pay it when you use a specific service, and the rate is set at a level to pay for the service you consume. It's like an entrance charge to a state park. You wouldn't call that a tax as long as that revenue is used to pay for upkeep of the park and the charge reflects what the costs are.

The gas tax, though not perfect, is an approximation of that relationship. Revenue received from gas taxes usually is used for road and highway maintenance; the fee you pay approximates how much road you consume. But different cars get different gas mileages; electric cars don't even use gas but they also don't cause less damage to the road. So the gas tax is not perfect but it is similar to a user fee. If states want to structure the gas tax like a user fee and if the state is not getting the money it needs for roads and repair, the next logical step would be to increase the gas tax. But people have to believe the money is being spent wisely. Not all states do that, and people say, "Well, I see this waste of money. If you increase my taxes, you'll waste a portion of it." When I say states are wasting money, I mean they are using it for road projects that people don't see as valuable -- the "bridge to nowhere." If there are no "bridges to nowhere" and people are driving over potholes, they'll be more willing to accept gas taxes to avoid potholes.

The way most state gas taxes are structured, the tax is a fee per gallon -- not a percentage of the price. That means, the gas tax does not keep up with inflation. Should states incorporate a percentage of price into their gas tax formula?

The price of gasoline is not a good reflection of the cost to the government of providing the roads that people use. The number of gallons you consume is not a perfect predictor of the amount of road you use or the road damage you cause. It's not clear to me why highway maintenance costs would be expected to fluctuate with the price of gasoline. When there was a huge oil crisis and the price of gas went way up, people drove a lot less. So you would expect highway maintenance costs would go down. It's not clear to me why highway excise taxes should be directly related to the cost of gasoline. That said, at some point maintenance is going to be more expensive in dollar amounts, even if a state never again added a highway and just maintained its current roads. If the cents-per-gallon charge remains the same for years, you could argue that it's like a tax cut.

What else can states do about funding road repairs?

Some have recommended getting away from the current system of gallons of gas used and move to a mileage tax where you tax automobiles, tractor trailers and the like based on how many miles they drive. There are several different proposals on how you would do that. All roads or most roads in a given state could have tolls. That would get away from the gallon-consumed type of tax and more toward number of miles driven. But even that is not perfect. You wouldn't want to charge a Smart car the same rate as a Hummer H3, which weighs five times more and causes more road damage. Also, you might want to charge people based on the specific road they drive on, with charges set at a rate to pay for all the expenses incurred on that road. A fancy interstate might require a lot of maintenance, so you might charge people at a specific rate to maintain that road. People who drive back roads ... their maintenance charge would be lower. Setting up a system where there's tolling on every road may not be practical.

At the simpler end, you could do total vehicle miles traveled. You could have an annual inspection and mark off what your miles were on your car and be charged based on that. Some of those approaches get closer to how much damage a car is actually causing to the road. These approaches might have an advantage over the gas tax. It doesn't matter if the car doesn't use any gas: If you drive a mile, you get charged for a mile.

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