Finance

The Gas Tax's Last Gasp

With the high price of gasoline, drivers are pouring so many dollars into their tanks that Exxon-Mobil reported record profits in October of $10 billion. And that was for one quarter. Paradoxically, drivers were pouring relatively fewer dollars into other entities that depend on gasoline spending: the various state and federal transportation trust funds.
by | December 2005

With the high price of gasoline, drivers are pouring so many dollars into their tanks that Exxon-Mobil reported record profits in October of $10 billion. And that was for one quarter. Paradoxically, drivers were pouring relatively fewer dollars into other entities that depend on gasoline spending: the various state and federal transportation trust funds.

This dynamic might seem strange, but it's simple economics. With prices up, people are buying fewer gallons of gasoline--and most gas taxes are levied on a per gallon basis.

This latest trend is one more straw in breaking the back of the gas tax as a preferred transportation funding method. Although gas taxes are the largest single source of transportation revenue, we have been moving away from them. Even before the recent rise in gas prices, federal and state gas taxes supplied only 35 percent of the $132 billion in federal, state and local highway funds.

The gas tax has served us well in many ways, but it is a tax that needs to be re-examined. It has a number of problems. Unlike a sales tax, it does not go up with inflation. And, legislators are unlikely to raise a per gallon gas tax when gas prices are going up, which is when a tax increase is needed.

Then there's global warming. As the polar ice caps melt, governments should encourage drivers to reduce gas use and thus produce less carbon dioxide. But if all drivers switched to a Toyota Prius or another electric hybrid car, funding for highways would drastically drop because these cars consume so much less gas. "We don't want to create a condition where the government is telling people to produce less CO2, but the revenue generator depends on people using more CO2," says Martin Wachs, a transportation researcher at the University of California at Berkeley. "We want to transition away from a system that depends on us selling gasoline to build and maintain our highways."

This makes sense from one point of view, but you could also turn Wachs' logic on its head. In an era of global warming, you want to tax gasoline as highly as possible, in order to discourage gasoline use in general.

Another problem with the gasoline tax comes from our tendency to use all or most of its proceeds for roads and highways. More than 30 states require all gas tax revenue to go to highway spending. But there's no more reason to use gas taxes only for building roads than there is to use sales taxes on food only for agricultural policies. The gas tax is not, after all, a user fee. A true user fee, like a toll on a road or admission to a park, is directly related to the activity in question and gives the user a choice about whether to pay for it. With the gas tax, you have to pay it or simply not drive. Or even use your lawn mower.

One way to fund transportation is through a broader based tax. In California, 23 counties have adopted a local option sales tax that supplies more than one third of total transportation revenues, Wachs points out. Because legislators are seeking as broad a base of support as possible, the revenue typically goes to a mix of projects, ranging from roads to bike paths to mass transit. Over time, this should build a more balanced transportation system and thus more balanced and livable communities.

For many transportation officials, the Holy Grail of funding is congestion pricing or road pricing: charging drivers by the mile of asphalt they drive--and upping the price during peak hours. A crude example of this is the variable-priced toll lane on a highway or on a few Interstates. But a far more interesting experiment is underway in Oregon, where the state transportation department and researchers at Oregon State University have equipped some cars with GPS devices that can record all roads a car uses and charge drivers accordingly. This has enormous potential and would be the fairest way of paying for roads.

The good and bad thing about our American system is its federalist nature. The 50 states provide a huge laboratory. If something works-- say the Oregon trial in road pricing or a privatization scheme somewhere else--other states can copy it. But transportation works best when it is a comprehensive system, and our federalist system tends to fragment it along jurisdictional lines. Given our Constitution, those tensions will probably remain. As for the gas tax, no matter how much you raise it, it won't pay the direct costs of our road system, much less other transportation needs.

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