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Monday, July 28, 2008

Dealing with the Decline in Gas Tax Revenues Due to the Decline in Driving

The Department of Transportion announced today that we drove 9.6 billion fewer vehicle-miles traveled (VMT) in May 2008 compared to May 2007. While that is good for reducing carbon emissions, it is bad for the Highway Trust Fund. When we use less gasoline, less gasoline excise taxes are collected.

According to Transportation Secretary Mary E. Peters: "By driving less and using more fuel-efficient vehicles, Americans are showing us that the highways of tomorrow cannot be supported solely by the federal gas tax."

Our current federal gasoline excise tax is 18.4 cents per gallon. It is not adjusted for inflation. It has been known for some time that adjustments would eventually need to be made in the rate or HTF funding approach as MPG of cars increased. Various studies have been done to get an idea of the problem and possible solutions to provide more funds for the HTF to maintain and build roads.

In December 2007, the National Surface Transportation Policy and Revenue Study Commission released its study of transportation funding issues and possible solutions. This lengthy report provides background on transportion and highway funding challenges and the results: roads in disrepair, increased congestion, economic losses due to problems of moving goods, and increased safety concerns. The report also looks at existing programs, funding problems and makes recommendations for preventing negative balances in the HTF. The Commission ended in July 2008.

Chapter 5 of the report lays out various recommendations. Some interesting ones include:
  • Have the revenues from the gas guzzler tax be directed to transportation projects.
  • Have any gas tax exemptions funded by the General Fund.
  • Have custom fees related to transportation go to HTF

A few observations:
  1. Carrots versus sticks: It is interesting that higher gas prices led to a drop in consumption. Several state governments have greenhouse gas emission reduction goals, why didn't they just raise their gasoline excise taxes and generate some needed funds while also helping their state to meet GHG emission reduction targets as a way to help meet their goal?
  • How should governments determine when a carrot - such as an income tax credit for purchase of a hybrid fuel car is warranted rather than incentivizing behavior with an added cost, such as a higher gasoline excise tax? Couldn't the federal government have encouraged people to buy hybrids by raising the gasoline excise tax rather than giving away tax credits - and done some good for the federal budget? Of course, there are other costs of higher gas taxes.
  • A problem with incentives is that they can sometimes fund activity that would have occurred anyway. For example, today most hybrid cars have waiting lists - even those without a tax credit.
  • Sticks, such as higher taxes, are hard to implement as evidenced by some policymakers wanting to provide some type of relief for today's high gas prices. There are alternatives to high gas prices - driving less, using public transportation, making sure cars are in good operating condition and not carrying "stuff" that doesn't need to be transported around continually.

2. Several states have suggested or studied an alternative to tax per gallon - tax per mile traveled. Of course, that is much harder to measure and collect relative to paying per gallon at the pump, but not impossible.

3. The gas guzzler tax could be expanded so that it also covers SUVs and the mileage rates modified to cover more "low" MPG cars.

Given tight budgets and plenty of other needs for general fund revenues, other options will need to be found for funding transportation and transit projects, particularly in light of declining gasoline excise tax collections.

What do you think?

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