State Transportation Funding Could Get Even Tougher as Oil Prices Rise

The U.S. and Israel’s war in Iran is likely to affect the U.S. economy in ways that are hard to foresee. One outcome isn’t difficult to foresee, however: Concerns about the rising cost of fuel will almost certainly shape the political debate heading into this year’s midterm elections, as fighting in the Middle East affects a key passage for the world’s oil. And higher gas prices may also make it harder for governments at all levels to meet their transportation funding needs — a tough political task even when prices aren’t rising.

The national average gas price as of March 12 is $3.59 a gallon, higher than it was yesterday, a week ago, a month ago and a year ago, according to AAA. The prices are the result of what the International Energy Agency (IEA) has called the biggest-ever disruption to the oil supply market amid the fighting in Iran and attacks on tankers in the Strait of Hormuz, a critical shipping channel. The price of oil continued to rise even after the IEA announced its member countries agreed to release 400 million barrels of oil from their strategic reserves. No one can say how much higher oil and gasoline prices will go in the near term; the record high for gas was over $5 a gallon in 2022. But even if oil prices begin to drop significantly, analysts expect gas prices to remain elevated, and to fall more slowly than the price of oil.

The price of gas has always been an important political issue and a stand-in for how voters feel about the cost of living in general. The recent spike is already shaking up the political conversation. President Donald Trump went from boasting about the price of gas during his State of the Union speech last month — “the lowest in four years, and falling fast” — to saying recently that the war is “far more important than having gasoline prices go up a little bit.” One Republican U.S. senator said recently that “Americans are going to have to make some sacrifices” in service to the war. It’s an awkward transition in a political season that, as of a few weeks ago, was defined by affordability concerns, with the two parties competing over plans to lower costs. The political ramifications could go beyond who wins or loses the next elections.

In federal politics, the price of gas is so touchy that Congress hasn’t raised the 18.4-cents-a-gallon gas tax since 1993. The revenue from that tax goes into the Highway Trust Fund, which is the main source of funding for state departments of transportation to build and maintain roads. Since the gas tax isn’t tied to inflation, the Highway Trust Fund hasn’t grown fast enough to keep up with infrastructure needs, and is in fact in danger of running out of money in the next few years.

To fill the gap over the last few decades, Congress has appropriated more money from the general fund to transportation spending. This year, with the Infrastructure Investment and Jobs Act expiring, Congress is debating the size and scope of the next surface transportation bill. The recent rise in gas prices is already affecting that debate, with a group of congressional Democrats backing legislation to suspend the federal gas tax altogether for the next six months. The bill would “protect critical infrastructure funding” by requiring general fund allocations to cover the lost revenue. (Some of the same lawmakers introduced a similar bill in 2022, during the Biden administration, when gas prices reached their highest recorded levels.) The more Congress leans on the general fund to pay for roads, the more it will face tough choices between transportation and other priorities.

“The gas tax just can’t keep up with the spending demand of the states to build new roads and maintain existing ones,” says Scott Monroe, a senior director in the global infrastructure and project finance group at Fitch Ratings. “It can already be kind of a toxic third rail, and in an environment where fuel prices are substantially higher … you would think it would narrow the political window.”

The same goes for states, all of which have gas taxes of their own, ranging from about 9 cents per gallon in Alaska to more than 70 cents per gallon in California. States rely on those revenues to pay for infrastructure needs, but it’s politically tricky for state legislatures to raise the tax rate in response to growing costs. States and cities faced additional transportation-related challenges in recent years as construction costs have skyrocketed and transit agencies have struggled to recover from the COVID-19 pandemic.

Just over half of states have a gas tax that adjusts automatically with inflation, which takes some of the difficulty out of the hands of state legislators. Those that don’t tie the tax to inflation often face a backlash every time they consider raising it. The dynamic is currently on display in Oregon, where Republican state legislators have organized a voter referendum in an attempt to overturn a Democratic-led transportation funding package that included a gas tax increase. Democrats were already not confident the tax would make it past voters; the recent spike in gas prices could make it even less likely. And it could limit the options of lawmakers in other states, like Pennsylvania, facing transportation funding challenges of their own.

“As things become less affordable or the cost of fuel increases, [lawmakers] are going to be more sensitive to asking people to pay even more,” says John Horvick, a public opinion pollster who works on transportation issues in Oregon.

The price of oil also has a direct impact on costs for transportation departments and agencies. Petroleum, for instance, is a binding ingredient in the asphalt used to pave roads. And the costs of transportation and fuel are baked into the price of all goods, affecting the amount that public agencies pay for construction and maintenance.

“Generally speaking,” Monroe says, “it’s just going to cause inflation.”