Key Takeaways:
- There are several reasons for the gas tax’s downfall. First, the federal gas tax and most state taxes on fuel are not indexed for inflation, so unless lawmakers enact new increases on a regular basis, inflation alone will eat away at gas tax revenues.
- A second reason that the gas tax is failing is that vehicles today are much more fuel efficient than vehicles in the past.
- Policy options to address this issue include dipping into general funds, increasing vehicle registration fees, or moving to road usage charge systems.
The gas tax is failing as a reliable source to fund transportation infrastructure in the United States. There are several reasons for the gas tax’s downfall. First, the federal gas tax and most state taxes on fuel are not indexed for inflation, so unless lawmakers enact new increases on a regular basis, inflation alone will eat away at gas tax revenues. The federal gas tax is not indexed to inflation and has sat at 18.4 cents per gallon since 1993. States, forced to make up for the lack of federal transportation infrastructure funds, have made some progress to increase their own gas taxes over the past decade but it might be too little too late. Note in the map below how lawmakers prefer to enact gas tax increases in non-election years.
A second reason that the gas tax is failing is that vehicles today are much more fuel efficient than vehicles in the past. As cars and trucks use less gas to go the same distance, less tax revenue will be collected to pay for road maintenance. Although consumer shifts towards larger SUVs and pickup trucks in recent years have slowed these efficiency gains. And finally, the emergence of hybrid and electric vehicles (EVs) and the expectation that EVs will replace gasoline-powered vehicles over the next few decades is the third and most existential reason that the gas tax is doomed. EVs skip the pump altogether, so EV drivers pay zero gas taxes. In response, most states have enacted special registration fees for EVs and hybrid vehicles in order to make up the difference.
To make matters worse, as inflation, fuel efficiency, and a shift towards EVs has reduced the funds available to pay for transportation projects, the actual purchasing power of those funds is further diminished because prices for construction and maintenance keep going up, with highway construction costs consistently rising faster than inflation. In fact, the Federal Highway Administration says that highway construction costs have increased by 50% in the last two years alone. And politicians are incentivized to spend what little transportation infrastructure funds they have on new projects instead of maintaining the current stock of roads and bridges, further exacerbating the problem for future generations.
Eventually, something’s got to give. One option is to continue down the road policymakers have detoured into so far: dip into the general fund and borrow money through bonds to pay for infrastructure projects and raise vehicle registration fees, especially on EVs that don’t pay into the gas tax. But if construction costs continue to outpace inflation and maintenance of current infrastructure is neglected, paying for transportation infrastructure out of the general fund will squeeze other important public programs, an especially difficult task for states that need to balance their budget each year.
The policy wonk’s favorite gas tax replacement is to switch from a gas tax funding mechanism to a road usage charge system. Several states (e.g., Oregon, Utah, and Virginia) have piloted programs where drivers pay for the number of miles traveled instead of a tax on fuel usage. This option has the benefit of preserving the user-fee system of the gas tax, where the actual users of the roads pay for them. But road usage charges face fierce pushback over privacy concerns. Increasing the number of toll roads and adding congestion pricing to urban centers are also user fees that could ameliorate the problem, but they’re unlikely to solve the issue in the long term. Toll administrators are already losing significant revenue to drivers that purposely obstruct or use fake license plates to fool the license plate readers most modern tolls rely on to charge users.
There’s no easy solution to replace the gas tax, which worked well as the main funding source for transportation infrastructure investment in the United States for many decades. Meanwhile, states will lead efforts to locate a viable solution.
FAQs
A second reason that the gas tax is failing is that vehicles today are much more fuel efficient than vehicles in the past. As cars and trucks use less gas to go the same distance, less tax revenue will be collected to pay for road maintenance.
What are the negative effects of the gas tax? ›
The gas tax is one of the most regressive taxes because it disproportionality negatively impacts lower-income residents. Gas taxes are a tax on a commodity that is a need not a luxury. The lower one's personal income, the larger percentage of that income is spent on gas.
Where does federal gas tax money go? ›
Gas taxes were first introduced as part of the 1932 Revenue Act. At the federal level, the gas tax has remained at 18.4 cents per gallon of gasoline since 1993. Most of this revenue goes into the Highway Trust Fund, which pays for major highways and public transportation.
What are the externalities of the gas tax? ›
If gasoline taxes are set based only on their effects on gasoline use, then the best governmental policy would be to set the gas tax equal to marginal damage: the value of all of the negative externalities that result from using a gallon of gasoline, including pollution, accidents, noise, and traffic congestion.
Where does the California gas tax go? ›
How the Use Fuel Tax Revenue is Used. Use fuel taxes provide revenue for planning, constructing, and maintaining California's publicly funded roadways and public mass transit systems.
Who benefits from the gasoline tax? ›
Funds generated from a gas tax pay for related government services like road construction, maintenance, repair, and public transportation. Because these taxes connect drivers to the costs of road upkeep, they encourage efficient road use, which helps limit congestion and the wear and tear that comes from overuse.
How does gas tax affect the economy? ›
Evidence on the Sales Impact of Fuel Economy Taxation. Provided that fuel economy tax policies do influence the price of vehicles, theory predicts that they will influence the relative market share of affected models and thereby change fleet fuel economy and ultimately gasoline consumption.
Who has the highest gas tax in the USA? ›
California has the highest tax rate on gasoline in the United States. As of July 2023, the gas tax in California amounted to 77.9 U.S. cents per gallon. California has long been known as the state with the highest tax rates – and consequently some of the highest fuel prices in the country.
What state has the lowest gas tax? ›
As of 2023, Alaska has the lowest gas tax in the nation, with a rate of $0.09 per gallon. The state benefits from its abundant oil reserves and relies heavily on revenue generated from oil production rather than gas taxes. On the other end of the spectrum, Pennsylvania has the highest gas tax rate at $0.61 per gallon.
How are roads paid for in the US? ›
What is the Highway Trust Fund, and how is it financed? The Highway Trust Fund finances most federal government spending for highways and mass transit. Revenues for the trust fund come from transportation-related excise taxes, primarily federal taxes on gasoline and diesel fuel.
Gas taxes have become more regressive over time, partially because of environmentally-oriented technological change, although the share of expenditures on gas taxes declines with expenditures much less than the share of income spent on gas taxes declines with income.
What are the 4 externalities? ›
There are four main types of externalities: positive production, positive consumption, negative production, and negative consumption.
What are the externalities of transport economics? ›
The most important externalities caused by road transport are accidents, road damage, environmental damage, congestion and oil dependence.
Why does California have such high gas taxes? ›
An isolated market and a special fuel blend
California requires a special blend of gasoline that reduces pollution — and costs more money. “California also has seen a drop of 66% in the amount of refineries in operation from where we were 40 years ago,” said Patrick De Haan, head of petroleum analysis for GasBuddy.
Does the California gas tax go into the General Fund? ›
Swap Excise Tax and Sales Taxes.
In 1971, the state extended the sales tax to gasoline, with most of the associated revenues going to the state General Fund. In 2000, the state began redirecting gasoline sales tax revenues from the General Fund to pay for various transportation programs.
Why is gas so expensive in California? ›
"California has its own blend of gasoline, it has very high taxes, and it has a cap-and-trade program," De Haan said. "All of those factor into what you pay at the pump."
What are the negative effects of high gas prices? ›
Rising gas prices may force some businesses to re-evaluate their hiring plans, holding off because they are uncertain about the economy's health. Less discretionary spending results in decreased sales, both of which can influence a company's ability to hire.
What are the negative impacts of gas? ›
Gasoline consumption contributes to air pollution
Gasoline is a toxic and highly flammable liquid. The vapors given off when gasoline evaporates and the substances produced when gasoline is burned (carbon monoxide, nitrogen oxides, particulate matter, and unburned hydrocarbons) contribute to air pollution.
What were the disadvantages of using gas? ›
Disadvantages of Natural Gas
- Natural gas is a nonrenewable resource. As with other fossil energy sources (i.e. coal and oil) natural gas is a limited source of energy and will eventually run out. ...
- Storage. ...
- Natural Gas Emits Carbon Dioxide. ...
- Natural gas can be difficult to harness.
To encourage more sustainable transportation habits, economists recommend higher gasoline taxes, which in theory should reduce fuel consumption, and higher fuel-efficiency requirements for new cars.
