Wall Street Journal: What Should Replace the Failing Federal Gasoline and Diesel Tax?

September 17, 2012


The Wall Street Journal says that almost everyone agrees that there has to be a better way than federal fuel taxes to pay for highway projects. The question is how to get there.


In an extensive section cover story on Sept. 17th the Journal explores the history of the gasoline tax and looks at possible options available to policymakers including vehicle miles traveled, toll roads, gas tax indexing, taxing crude oil and a federal vehicle registration fee.


The story notes that fuel taxes have been the main source of funds for building and maintaining the nation's roadways. A key conclusion matches the position of transportation advocates in Texas:


"But now there is agreement across the political spectrum that the gas tax is broken and needs to be replaced, or at least overhauled. The problem is twofold: First, the tax has failed to keep up with the rising cost of highway construction and repair. And second, improved fuel economy and the rise of hybrid and electric vehicles means that more driving won't be matched by higher gasoline sales, and that how much people pay for the roads won't necessarily reflect how much they use them." They also note that the tax buys about half of the concrete, steel and asphalt it did 20 years ago.


Here is more from the WSJ: "Some states have managed to increase the tax, but many have had to increase their reliance on other sources—registration fees, sales taxes and general-revenue funds—to meet their transportation needs.

"Looking ahead, the Congressional Budget Office predicts gas-tax revenue will fall by a cumulative $57 billion over the next 11 years thanks to a scheduled increase in federal fuel-economy standards. That's a 13% cumulative reduction in projections for the trust fund over that period.


"It's true that Congress could just raise the gas tax. But the tax is already unpopular, and lawmakers have resisted repeated efforts to increase it. In fact, amid high gasoline prices, many politicians have called for cutting the tax to give drivers some relief at the pump.


"So a more comprehensive fix is needed. And this is where it gets more complicated.
Though almost all the politicians and transportation experts who have looked at it agree that the tax needs to be fixed, they don't agree on what that fix should be. They've floated all sorts of possible alternatives, including raising vehicle registration fees, using technology to track drivers' actual mileage and taxing oil rather than gasoline."




The story notes that the idea that gets the broadest support for replacing the fuels tax is to take the user-fee piece of the gas tax to its logical conslusion: the vehicle miles traveled tax or mileage-based user fee which is seen as the fairest, most sustainable replacement for the gasoline tax. The problem is how to track the miles.


The Journal says that the one big advantage of toll roads is that they tend to be more popular than the alternatives.


On the idea of indexing the federal tax the Journal writes:

"Even supporters of mileage-based user fees concede they are a long-term fix. In the near term, some favor changing the gas tax so that it at least keeps up with the rising cost of construction without requiring lawmakers to cast a series of politically unpopular votes to raise the tax rate.


"A simple approach would be to replace the per-gallon tax with a percentage-based sales tax. Several states, including Indiana and Georgia, already supplement their motor-fuels tax with a sales tax. A 2009 study of transportation-funding alternatives estimated that a federal sales tax of 1% on gasoline could raise about $7.2 billion of revenue a year, based on gas prices of $4 a gallon.


"Even so, a sales tax would be a volatile source of transportation funds given the wide swings in the price of gasoline. And it doesn't address the long-term threat to revenue posed by increasing fuel efficiency.

"Another solution is to index the tax rate to some measure of inflation, such as the Consumer Price Index or an index of highway construction costs. The rate could be automatically adjusted quarterly or annually as prices rose."

"Florida currently indexes a portion of its gasoline tax to the Consumer Price Index; in 2011 the indexed portion accounted for 19.5 cents of the state fuel tax of 23.5 cents a gallon. While the CPI is more familiar to voters, tying the rate to construction costs would better keep up with inflation in building materials, which in the past decade or so has increased faster than general inflation."


An option available to the Federal Government is to replace the federal fuels tax with a tax on every barrel of crude oil consumed in the country.


The Journal: "The proposal, studied by the RAND Corp. in 2011, estimated that at mid-2010 oil prices of $72 a barrel, a 17% oil tax would generate about $83 billion a year, the projected appropriation for highways and transit over the next six years. To raise the same amount, the federal gasoline tax would have to increase to 46 cents a gallon and the tax on diesel fuel would have to rise to 52 cents a gallon. The RAND study also proposed making the rate flexible so that it produces a steady revenue stream amid volatile oil prices. The rate would increase if oil prices decline because of, say, a soft economy and reduced driving, and it would fall as oil prices increase so that consumers aren't hit with high prices and high oil taxes."





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