Gas Taxes: Broken? Antiquated? A "Fossil"?

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With enormous transportation funding shortfalls on the horizon at both the federal and state levels, lawmakers are thinking about how they will address the problem of inadequate transportation funds in the short-term and long-term. Major developments in both these short- and long-term components of the issue occurred over the last few days in the form of a House bill that would supplement the Highway Trust Fund with general fund revenues, and the unveiling of the Bush Administration's transportation plan by Transportation Secretary Mary Peters.

On the revenue side of the Administration's transportation plan, Secretary Peters rightly points out that changes in Americans' driving habits, as well as the inevitable shift towards improved vehicle fuel economy, have created serious sustainability problems for the gas tax as a source of transportation funding. In the long run, these changes may spell the end for the gas tax as a meaningful source of transportation revenue, but many political figures are prematurely declaring that day to have already arrived.

In her description of the Bush Administration's transportation plan, Secretary Peters referred to the gas tax funding mechanism as "broken" and "antiquated". Unfortunately, this sentiment is surprisingly common. Virginia Governor Tim Kaine, for example, recently referred to the tax as a "fossil". The frustration being felt by government leaders over declining gas tax revenues is understandable, but persuasive reasons exist for viewing the gas tax not as an obsolete relic of a bygone era, but as a useful option for addressing immediate funding shortfalls.

While some of the blame for the inadequacy of the gas tax can be placed on reduced demand, much of the problem stems from the unwillingness of legislators to increase tax rates when necessary. The federal gas tax has been set at 18.4 cents per gallon since 1993, but because of inflation, the real value of that amount has declined by over 30%. States are feeling the pinch too, as well over half of the states haven't increased their tax in over 5 years.

The consequences of this inaction have been dire. The one year anniversary of the Minnesota bridge collapse has brought with it a pair of studies into the continued lack of maintenance (driven largely by lack of funding) of the nation's bridges. Clearly, the usual arguments that we can just "trim the fat" instead of raising taxes will not suffice. The House of Representatives recognized this fact recently and passed a bill that would fill the shortfall in the Highway Trust Fund with general revenues (which would obviously increase the over budget deficit). The Bush Administration has threatened to veto this bill on the grounds that highway users, rather than taxpayers at large, should be responsible for funding the transportation infrastructure. It's ironic then that the Administration has proposed filling the gap with funds taken from mass transit. In either case, filling a gap that is sure to reoccur with one-time revenues leaves something to be desired.

Of course, increasing the gas tax could result in revenues that would satisfy the Administration's demand that transportation be paid for by its users, but for some reason that option is completely off the table. Even some states have decided to avoid the issue of the gas tax by proposing to pay for transportation with revenues unrelated to road usage. Recent proposals in Virginia and Arizona have included provisions to use sales tax revenues for transportation, despite the fact that these states have not raised their gas taxes since 1986 and 1990, respectively.

Admittedly, increased tolling and taxes on vehicle miles traveled may now be better suited to perform the job the gas tax was originally designed to do: serve as a user-charge for drivers. But these options are cumbersome to implement, and are therefore not well suited for addressing the immediate revenue shortfall. While policymakers need to spend time fleshing out these ideas in preparation for the impending rearrangement of transportation finance, they should also spend some time thinking about the merits of increasing gas taxes (perhaps by indexing the rate to inflation, as is done in Maine) as a way of preserving a rough user-fee system in the short-term, rather than relying on sales taxes and one-time funding injections.

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