Neck Deep in Politics: Why Increasing the Gas Tax Makes Sense but Won’t Happen

Last week, the President’s deficit reduction commission (National Commission on Fiscal Responsibility and Reform) was due to vote on the recommendation to raise the federal gas tax by 15 cents by 2013. This increase was part of the commission’s draft plan to reduce the deficit by $3.8 trillion, and all the funding raised by this tax increase would be “dedicated to fully fund the transportation trust funds and therefore eliminating the need for further general fund bailouts,” according to co-chairmen Democrat Erskine Bowles and Republican Alan Simpson’s proposal. The transportation trust fund is what pays for roads and bridges, and has been bankrupt requiring infusions from the general fund.

A hike in the federal gas tax died when the entire deficit reduction plan stalled out. Since 1993, the current federal gas tax has been 18.3 cents, which due to inflation has the spending power of closer to 12 cents and is why the trust fund cannot pay for itself. Gas tax proposals in the past have garnered essentially no political support. The new congress is lead by Republicans who vehemently oppose raising taxes, while Democrats, who are more likely to consider some tax increases, oppose regressive taxes paid by everyone including the poor and unemployed. In this political climate, increasing the gas tax seems not just unlikely but almost far-fetched. However, supporters of the gas tax increase can take some solace in support from most economists, environmental scientists, and the U.S. Chamber of Commerce (who almost always opposes taxes as a general rule).

Regardless of the politics, a change in the gas tax is likely the fastest way to promote more environmentally-friendly driving among consumers. I am already on record as opposing the CAFE rules because they completely ignore the consumer market. For example, without added economic incentive for even modest fuel-saving solutions (or an outright requirement), products like start-stop systems (micro hybrids) receive a very chilly reception in the U.S. market. I point to start-stop technology because it’s one of the cheapest ways to get a decent improvement in fuel efficiency.

In Europe, there are 27 vehicle models featuring start-stop systems, while in the U.S. there are only three: the 2011 Porsche Panamera, 2011 Porsche Cayenne, and the 2011 BMW M3. The argument over whether to include start-stop systems becomes an argument about how vehicles are tested for their emissions and fuel economy ratings, rather than a market-based value for the dollar discussion. OEMs are forced to assess whether a 1% gain (or less) in their CAFE ruling is worth the extra several hundred dollars in cost. In essence, that cost would just come off their bottom line since the fuel economy gains of start-stop systems will be measured in tens of dollars per year at current gas prices.

But start-stop systems are not the only loser in this battle over fuel taxes. Natural gas, LPG, electric and even some hybrids vehicles (particularly heavy duty trucks) are all forced to rely on tax incentives. At the current price of gas and diesel, many of these vehicles’ upfront costs are high enough that the total ownership cost remains higher than that of a gasoline vehicle. While a 15 cent gas tax is probably too modest to really have an impact on any of these issues, no added gas tax won’t even bring the much needed extra revenue.

As a senior analyst contributing to Pike Research’s clean transportation practice, Dave Hurst’s primary focus is on analyzing emerging markets for electric vehicles, natural gas vehicles, hydrogen fuel cell vehicles, and other means of electric transportation such as scooters and motorcycles. He is an experienced transportation consultant and market researcher with 13 years of market analysis experience for automobile OEMs, suppliers, and advertisers.

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  • MrEnergyCzar

    15 cents is a joke. Eventually, we’ll have a choice of rationing or a very high gas tax like Europe. Our car registration and insurance will also be based on how many miles we drive as more and more cars come off the road…..

  • veek

    Thanks for the article and the analysis.

    You make a good case that raising taxes are a better solution than raising CAFE standards. Those standards have also been notoriously susceptible to “voodoo mathematics” and manipulation. Car owners and fuel users should certainly pay for the infrastructure that supports them — that’s just common sense and good business. Also, with low fuel taxes (which effectively means higher fuel consumption), OPEC will get the most benefit when fuel prices again rise to the level that consumers will support, and OPEC will have more incentive to raise those prices to that level.

    Our governments could also help us out a bit by lowering registration and sales taxes for fuel-efficient vehicles and raising them for fuel-inefficient vehicles. In my state, those fees for a new vehicle are considerably higher than the fuel savings I would generate by buying, say, a Prius or Fusion Hybrid, so it makes little direct economic sense to trade in a serviceable older vehicle for a new, more efficient one. Taxing fuel-efficient and fuel-inefficient vehicles at the same rate also makes little sense, if we are trying to lower carbon emissions and make the US depend less on OPEC.

  • Anonymous

    Where to begin? The HTF is underfunded for several reasons. Too much spending. We need to address not spending more than the projected income.

    Second, the funds, a fraction are diverted to mass transit. That needs to be eliminated. Mass Transit should be user pay system or paid out of the general, not a diversion of highway funds.

    Three, the tax is not indexed for inflation. It should go up at the same rate as social security checks go up.

    Four, as gas prices rise, and high mileage vehicles like 50 MPG Hybrids, the “per gallon” tax brings in lower amounts. This could be addressed by simply increasing the tax, but plug-in technology bypasses that “more per gallon” fix. A new tax on the energy supplied via the plug needs to be created. Something like 2 cents per kilowatt-hour.

  • Max Reid

    2% of the taxes we pay goes for Highway construction. Mass Transit is paid by the riders.

    Oil is subsidized here, thats why we have $3/gallon gas and $4/gallon in oil exporting country like Canada.

    What about the billions of dollars spent on protecting the Persian Gulf. Its another type of subsidy to oil companies.

    No wonder our national debt stands at $ 13.8 trillion and thats 94% of GDP. Only as long as Chinese and Arabs invest here, we can have this lifestyle, if they stop, we have to board the Trains. Get ready for that.

  • Charles

    I am going to beat a dead horse. Two cents a gallon a month increase for the next eight years. No shock to the system. The middle and lower income people can make more economical decisions and not have their fuel bill increase. As I have posted before going from 21 MPG to 26 MPG gets you 71 cents a gallon at $3.00 a gallon. That is just a change from a V6 to I4 Ford Fusion. If you go down a size class from say a Fusion to new Focus (assuming 33 MPG for the Focus) gets you $1.71 a gallon at $3.00 a gallon. If you went all the way from V6 to Hybrid (39 MPG) Fusion you would get $2.57 a gallon at $3.00 per gallon. That more than covers my $1.92 per gallon eight year tax increase.

    BTW Anonymous, too much spending is not why the HTF is too low. We are not taxed enough for our fuel. We are underfunding road and bridge maintenance. We need to spend more just to keep the roads we have in good shape. The only way to do that is to increase revenue. There a good arguments about how to raise the taxes for the HTF, but no good ones to not raise funding.

  • Anonymous

    BTW Charles, we can talk about ways to raise revenue, but for you to argue we don’t need to spend more wisely and efficiently,and that we don’t need to stop the diversions, is just a “spend, baby spend” mindset.

  • Charles

    Dear Anonymous,

    I do think we need to spend our money wisely and efficiently. But the need is great. For example:

    Of approximately 600,000 highway bridges in the United States, about 160,000 are either deficient or obsolete, said Andy Herrmann, a bridge engineer who is the president-elect of the American Society of Civil Engineers. While it doesn’t mean the bridges are unsafe, it does mean weight and speed restrictions combined with immediate repairs are needed or the bridges should be closed, Herrmann said.

    If the average was just a $100,000 per bridge that would exhaust the HTF. There is just no way at current funding levels that we can fix the problems that we know about. I am for “Spend Baby Spend” where we need it. And the current roads really need it.

  • Anonymous

    As I understand it, the spending decisions are riddled with earmarks, i.e. the bridge to nowhere, while other bridges collapse due to a lack of funding in response to an engineering evaluation. And what about those billions being diverted to “bullet trains” and other boondoggles.

  • 55mpg

    The best option in front of the government would be to slap some kind of taxes on the big oil companies. Call it windfall tax, pollution tax what ever. Since everybody likes to tax the evil corporations, this is a politically correct approach.

    How will the oil companies recoup the revenues lost due to this additional tax? By increasing prices on gasoline and diesel.

    I would imagine this is happening already. The government slapped a $20 billion fine on BP and now gas prices are going up, even though there was no big increase in the oil price.

  • Anonymous

    Everybody likes to tax the “evil corporations?” Taxes on corporations result in higher product costs and less productive expansion. Only the folks who brought you the economic model of the Soviet Union think like that.

    Ending or curtailing our dependence on air polluting oil by using effective tax policy is an important subject. We need a consumption based tax, the more you use, the more you pay, like with water and electricity.

  • Yegor

    What to say here? You have to pay for the roads somehow.

    And the best way to do it is the fuel pump tax – everyone pays accordingly to the amount he/she drives – which is the amount he/she uses the road. This is the only fair way to do it!

  • Charles

    Dear Anonymous,

    It was with malice of forethought that I said “current roads”. With all of the stuff that needs repairs, I think we should concentrate our limited resources on keeping what we have in good shape. Bridges to nowhere need to be deleted.

    As for high speed rail, it really matters if it will save us in the long run. If we can build a train that goes from Raleigh to Charlotte NC that will remove significant cars from the roads that would save us from having to widen I40 and I85. Should the money to build the rail come from the HTF? I do not know. I can see it both ways.

    One man’s boondoggle is another man’s great project. NASA may be the best example of that. A lesser know example would be the Valkyrie XB-70 bomber. Lots of money spent on a project that never made it into production. On the face of it a total boondoggle. But, it did force the USSR to spend like a drunken sailor to defend against it. So was it a boondoggle or not? Two things for sure we learned a lot about high speed flight and we have a really nice museum exhibit.

  • Samie

    It always amazes me when people assume you can just cut government spending to solve budget problems. Like any household, you have revenue and expenditures. If you cut revenue drastically you risk not being to fund even basic government spending. We tend to borrow the difference to make up the funding in promise of lower taxes, while in realistically

  • Samie

    Sorry… The point was that there are two sides to this to be fiscally responsible you can not just cut government spending while ignoring revenue needed to uphold basic services. Short term political game .

  • veek

    55 mpg:

    Actually, the oil companies are already taxed heavily for the fuel they sell — it’s just that the taxes are paid up front at the pump, when the consumer first buys the fuel.

    I think you’ll also find federal and state governments actually make more “profit,” in taxes, from a gallon of fuel than the oil companies do, even if those taxes are far too low. We often hear that politicians are under the control of the oil companies, and although I’m certainly not defending the honesty of our politicians, most politicians consider that providing plenty of cheap oil is vital for the US economy. In actuality, cheap oil is a drain on our economy, just as heroin is more expensive to the addict than the out-of-pocket cost they pay.

  • Stephen Towell

    Once again, I see that the repercussions of increasing gas taxes are not being noticed. I am sorry that I am unable to buy a hybrid car or buy more green products. You see, I am still trying to find a job. I just don’t have the money. So this approach punishes all of us who can’t afford increases in not only gasoline, but in food…….the cost of transporting goods goes up…….price goes up. Jobs also take a hit, beause in the area of tourism, people have to cut back on traveling.
    Also the only excuse that is being made to justify this, is the old comparison factor. Shame on you !
    Can we have a goverment that is looking to help it’s citizens and not hurt us?

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