Gasoline Excise Tax Outdated - What will come from recent House hearing on this?

The federal gasoline excise tax that helps fund road construction and maintenance has been 18 cents per gallon since 1993! The tax is not tied to the price of gasoline or adjusted for inflation. It requires an act of Congress to increase the tax.

For many years there have been federal and state government studies and ones by think tanks and academics on alternatives to the gasoline excise tax to fund roads, mainly driven by the fact that we drive more fuel efficient cars each year and today many cars run on electricity not gasoline. Since 2008, Congress periodically transfers money from the general fund to the Highway Trust Fund to help it out.

What's the remedy?

While the gasoline excise tax could be increased, that imposes a higher burden on those driving gasoline powered vehicles to fund the roads that are used by others as well. But at least tying the amount to inflation seems to make sense.

Fuel efficient cars and electric cars could be charged an annual registration fee equal to what they would likely pay in excise taxes if instead they drove a typical gasoline burning vehicle.

A road usage fee could be charged, such as a vehicle miles traveled tax (VMT), that has been heavily studied in Oregon and California (and likely elsewhere as well). It is not difficult to track how many miles someone drives and there are ways it can be paid monthly or at least annually when the owner registers their car with their state (with the state sending the tax to the federal government).

On October 18, 2023, the House Transportation & Infrastructure Committee held a hearing on this issue - Running on Empty: The Highway Trust Fund. One of the witnesses was the Oregon Dept. of Transportation Director who had lots of interesting testimony. It included that since 1993 when the current 18 cents per gallon tax was set, inflation on housing has been 306%, 280% on health care and gasoline at 276%.

The Oregon rep also explained road usage charges (RUC) noting that they might also be called VMT or mileage-based user fee (MBUF). Since Oregon has been studying and testing this system for some time, their testimony provides some of this background.

Key takeaways:

- A change is way past due to fund the Highway Trust Fund, or make a decision to get rid of it and fund roads from the General Fund.

- Convert to a RUC and use lessons learned from Oregon's pilot programs in this area.

- Don't keep postponing a fix because we'll continue to have more electric vehicles on the road in the next several years. I recall that around the time when tax reform was being discussed actively in 2011 through 2015 a subgroup of the Senate Finance Committee studied tax and infrastructure issues. They noted that we should move to a VMT and it would take about 10 years lead time to do so. But nothing was started and here was are 10 years later with no change.

What do you think?

Gasoline Excise Tax Is Not Too High

The gasoline excise tax has been 18.4 cents per gallon since 1993. It is not adjusted for inflation and Congress has not changed its rate or its operation. This tax funds the Highway Trust Fund for road construction and maintenance. Costs for those projects continue to go up yet we don't even adjust the gasoline excise tax for inflation. If we did, the tax would be 36 cents per gallon.  If the tax were adjusted for how we fuel our cars, we would have a vehicle miles traveled tax (VMT) rather than one tied to buying gasoline. Today, many cars use the road where owners buy no gasoline.

In 2020, the gasoline excise tax generated about $24 billion of revenue. That is not a lot for a roughly $3.5 trillion federal budget. It is not near enough to fund all needed road projects. Occasionally, such as with the recent Infrastructure Investment and Jobs Act (PL 117-59; 11/15/21), funds need to be transferred from the General Fund to the Highway Trust Fund. The gasoline excise tax needs a fix, not repeal, even if temporary.

So, why are a few members of Congress proposing to suspend the gas for the rest of the year? Inflation and helping drivers of cars that use gasoline. Here is their Senate bill to suspend the tax through the rest of 2022 and have funds moved from the General Fund to the HTF.

This might sound good, but is a bad idea. What will be cut to move the funds from the General Fund to the Highway Trust Fund or will the debt just increase? The smallest element of the price at the pump is likely the federal gasoline excise tax - it it just 18.4 cents per gallon.  I paid $5/gallon in fueling my Prius yesterday. State gasoline excise taxes are higher, ranging from 19 cents per gallon to 56.6 cents per gallon.

What is the point of having this system of trying to fund road projects if the tax is suspended? The tax is already half of what it should be if it had been adjusted for inflation since 1993. It also might not lower the cost of gasoline as those in the supply chain might just raise prices to absorb that tax cut.

Where is the discussion about fixing this outdated tax to a VMT or whether it should just be repealed with roads funded by the General Fund and tolls. Or, what about relief only for low-income individuals given the regressivity of the gasoline excise tax?

What do you think?

The carbon tax war

Well, it's not a carbon tax war yet as neither side of this issue in Congress seems to have it as their number one issue.  A carbon tax aims to increase the cost of using one type of fuel that leads to greenhouse gas (GHG) emissions and climate change. There are other types of GHG emission, but per the EPA, carbon emissions represent 81% of the total. There are negative externalities of using carbon fuels (gas and coal for example) in that the emissions harms the environment and leads to climate change. To help address these costs, the cost of the carbon producing items needs to be increased, thus, the call for a carbon tax.

While coal and gas (including natural gas) are key carbon emissions, a carbon tax would need to be imposed on each of these types of emissions to truly be a carbon tax. Sometimes, a proposal only calls for imposing it on gasoline by increasing the existing tax on this fuel. This would be easier as the gasoline excise tax already exists, but it then ignores the negative externalities of other sources of GHG emissions.

There has been increased attention on a carbon tax recently due to presidential candidate Senator Bernie Sanders talking about it. These discussions tend to be very narrow and he seems to focus on a carbon tax being the only way to address climate change.  I recall in a debate with Secretary Clinton that he asked her - do you support a carbon tax or not.

There are other ways to address the negative externalities of GHG emissions. This includes fees, penalties for excess emissions, education, and support for use of alternative energy sources that do not produce GHG emissions.

There has been some recent activities in Congress and the White House:

• H.Res. 767 passed in the House on 6/8/16 to express the “sense of Congress that a carbon tax would be detrimental to the United States economy” and “opposing the President’s proposed $10 tax on every barrel of oil.”

• President Obama proposed the $10 per barrel fee on oil to be imposed on oil companies in a 2/4/16 Fact Sheet on his 21^st Century Clean Transportation System. The plan is designed to encourage investment in clean transportation options that can also help reduce what President Obama refers to as a hidden tax due to congestion that annually “costs families $160 billion and businesses almost $30 billion.”  One likely reason why he proposed this is that Congress will not increase the gasoline excise tax which has been 18.4 cents per gallon since 1993 (see my blog post of 8/17/15). One reason is that too many members of Congress have signed the pledge to not increase taxes, which hurts our tax system. (For example, this pledge supports keeping an ineffective credit, deduction or exclusion because to get rid of it would be a tax increase.)

• S. 1548 (114th Cong), American Opportunity Carbon Fee Act, would “impose fees on: (1) fossil fuel products producing carbon dioxide emissions, including coal, petroleum products, and natural gas; (2) fluorinated greenhouse gases; (3) emissions of any greenhouse gas from any greenhouse gas emissions source; and (4) methane emissions.” In addition, this proposal: “Reduces the maximum income tax rate on corporations to 29% of taxable income over $75,000. Allows a new carbon fee offset tax credit for the lesser of: (1) 6.2% of earned income, or (2) $500.”  Also see 6/10/16 statement of sponsors Senators Whitehouse and Schatz, and their 1-page summary of the legislation.

Issues that need to be addressed in a carbon tax include:

• Equity - the tax is regressive in that it represents a bigger percentage of the income of a low-income taxpayer relative to a high-income taxpayer.  The credit in S. 1548 addresses some of this concern.
• Simplicity - how can such a tax be designed to be simple rather than add a new layer of complexity onto what is already a complicated tax system.
• Fit - does the tax best fit the problem. For example, only taxing gasoline doesn't address the problem that other fuels also produce GHG emissions. 
• Alternatives - what alternatives exist. In addition to the ones I mentioned above, the current tax provisions incentivizing production of carbon fuels should be cut back.

What do you think? 

Highway Trust Fund and Tax Reform

Deficits in the Highway Trust Fund have been "patched" since 2008, mostly with transfers from the General Fund. A recent patch was in PL 114-41 (7/31/15) to cover three months. I remain puzzled why elected officials at least don't adjust the gasoline excise taxes for inflation (the gasoline excise tax most of us pay has been 18.3 or 18.4 cents per gallon since 1993 (see history table from the Tax Foundation). The adjustment could even be transitioned in over a few years to ease the change (the rate today would be 30.2 cents per gallon). I believe the public knows that the costs of maintaining and building roads and assisting public transit go up annually for the costs of inflation, and realize that the key funding source should also be adjusted for inflation.  Oh well.  Note - on 8/6/15, Senator Carper (D-DE) introduced legislation to increase the gasoline excise taxes.

A new proposal from the Senate Finance Committee Tax Reform Working Group on Infrastructure was released in July. It calls for "deemed repatriation" to help the Highway Trust Fund for six years to also give us time for a long-term solution that likely would be a miles traveled tax.  They want to keep some type of match between road usage and paying for them and realize that the gasoline excise tax is deficient in a few ways. Most notably, as we have more cars on the road that don't even use gasoline, there is a disconnect between usage and contributing to maintaining the roads for such usage.

I have a short article in the AICPA Tax Insider (8/13/15) on the working group proposal. The article also has some additional background on the HTF and its problems.

What do you think?

7th Anniversary of 21st Century Taxation Blog

Today - May 14, 2014 marks the 7th anniversary of this 21st Century Taxation Blog. I started this blog when I was a fellow with the New America Foundation.  I was charged with getting new ideas out into the mainstream, such as through op eds.  Given the times, I thought a blog might also be a helpful approach.  I think it has.  I aim to post at least weekly and now I also blog at SalesTaxSupport.com and Biowebspin and my blog entries are picked up by Proformative and Tax Connections.  I've met people I likely would not have met if I had not been blogging.  And, it's fun.

My initial aim hasn't changed.  I aim to critique proposals and existing rules as to whether they meet principles of good tax policy and help move our tax systems into the 21st century ways of living and doing business.  I also suggest some ideas of my own. And I've got a variety of websites related to tax reform at http://www.21stcenturytaxation.com/.

Here are two reforms I'll offer today:

1. As part of federal income tax reform, repeal Section 263A - the unicap rules.  These rules were not really needed when enacted as part of the Tax Reform Act of 1986.  Their main purpose was likely as a revenue raiser to help lower rates. These rules apply to large retailers (over $10 million of receipts) and producers of tangible property (whether for self-use of sale). We have other rules governing capitalization of benefits that provide long-term benefits (Section 263(a)). We have longstanding rules on what a producer of inventory needs to capitalize (similar to what is required for books). Also, today, companies likely employ more just-in-time inventory practices than in 1986.  Unicap requires calculations and recordkeeping beyond what is required for financial statements. It is only a timing difference. Let's really simplify the federal income tax law and repeal it.  [See 2008 post and link to a "trends" and tax reform table at the end.]

2. As part of eliminating the continued deficits in the Highway Trust Fund, let's explore a gas tax that is not based on how many gallons of gas you purchase. Instead, let's find a way to tie it to how many miles you drive.  With people driving more fuel efficient cars, including ones that don't even require purchase of gasoline, the current system is outdated. Oregon experimented with a vehicle miles traveled approach and there are studies out on alternatives. [See 2010 post and 2014 post.]

What do you suggest to move our tax system into the 21st century?

Thanks for reading this blog!

Taxes and Deficits in the Highway Trust Fund

Today (May 6, 2014), the Senate Finance Committee is holding a hearing - New Routes for Funding and Financing Highways and Transit. The Highway Trust Fund (HTF) has had funding issues for several years and is projected to have another deficit for this fiscal year (ending 9/30/14).

Every time you buy a gallon of gasoline, you pay 18.4 cents of gasoline excise tax to the federal government (you also pay something to your state government). The 18.4 cent federal tax has been the same amount since 1997!  Of this amount, 15.44 cents goes to the HTF, 2.86 cents goes to the Mass Transit Fund and 0.1 cents goes to the Leaking Underground Storage Tank (LUST) Trust Fund. (For the history of the tax, see the Dept. of Transportation website.)  The HTF is used for maintenance and constructions of roads.

At March 2013, the Congressional Budget Office noted the expected growing deficits in the HTF:



http://www.cbo.gov/budget-options/2013/44853

Per the CBO, a 1 cent increase in the gasoline excise tax generates about $1.5 billion. Thus, a $20 billion shortfall could be addressed with a 14 cent increase.  That doesn't sound too bad. But that only helps through 2016. There are longer term problems.

Funding issues seem to be:

• The excise tax has remained at 18 cents per gallon since 1993. If it had been adjusted for inflation, it would be 30 cents today. Thus, part of the problem is that the tax is not adjusted for the effects of inflation.
• We continue to drive cars that are more fuel efficient. Thus, we may be driving the same amount (or even more), but purchasing fewer gallons of gas. And all electric vehicles buy no gas at all.

A few years ago, Oregon experimented with alternatives to a per gallon tax as they expected people to be buying less gas, but not reducing driving. One alternative is a tax per mile driven (VMT). Many view this as unpopular as it is more complicated to compute (you need to track your miles) and the use of technology that can make it easy to compute and pay raises privacy concerns for some. But those issues are all addressable.  Also, today, many people have fast pass devices in their cars to make it easy to pay road and bridge tolls so perhaps the privacy concern is not high.

The FY2015 House Budget Report notes problems with the HTF, but has no specific solutions. It makes no mention of raising the gasoline excise tax (see pages 43-45).

Congressman Camp's Tax Reform Act of 2014 discussion draft proposes to use funds generated from an international tax changes to support the HTF and mass transit fund (see pages 143-144).

I do not agree with using an income tax change to fund the HTF or not raising the tax. Of course, transfers from the General Fund to the HTF in recent years have had a similar effect to use of income taxes (and helped raise the deficit). The gasoline excise tax is to help fund highways and mass transit and can continue to do so. An increase to 35 cents per mile, even transitioned in over the next two years would be a good start. Long-term, a better remedy, such as the VMT, is needed.  Certainly, if we have more electric cars on the road, which don't generate anything for the HTF, but still use the roads, a funding mechanism tied only to gasoline purchases is outdated.

What do you think?

Gas Tax and Tax Reform

I was recently asked by a reporter for StreetsBlog.org if tax reform might also include an increase in the gas tax.   "Will an Upcoming Tax Reform Finally Be thePlace to Hike the Gas Tax?" by Tanya Snyder,
Streetsblog Capitol Hill, 3/14/13.

I said no.  Tax reform discussions have focused on the income tax. Also, an increase to the gas tax is likely something more for a budget discussion - are more funds needed for the Highway Trust Fund (yes).

Yet, tax reform will focus on cutting back or eliminating tax preferences ("base broadening"). Will that include ones, such as repealing percentage depletion, that benefit the oil and gas industry? President Obama has already suggested this action in his FY2013 budget released in February 2012. If these changes are enacted, tax liabilities for oil companies will increase and quite possibly gas prices.  That doesn't bring in money for the Highway Trust Fund though.  It does make the public less inclined to accept a gasoline excise tax increase and for their elected officials to give them one.  So perhaps tax reform or budget dsicussions should include allocating a portion of the general fund to the Highway Trust Fund.

Tax reform, a time to review the system and identify weaknesses and how to fix them, should ideally consider these transportation-related items:

1. Gasoline excise tax reform - with more fuel efficient vehicles on the road, people buy fewer gallons of gasoline and thus pay less excise tax, but likely drive as many miles or even more than prior to owning the fuel efficient car.  So, a new system is needed.  A common suggestion is to switch to a vehicle miles traveled (VMT) tax rather than the current fixed cents per gallon of gas purchased.  For more on the VMT tax, see this Rand study or just do a Google search on the topic. Oregon has been studying it for years and even did a pilot of it (see 12/27/12 Governing blog post). 
2. Carbon tax - can this help reduce greenhouse gas emissions? Can it help reduce the deficit?  See this March 2013 paper on this topic from the Tax Policy Center.

Excise tax reform can be separate from income tax reform. If income tax reform is focused on the budget though, it should be considered as it affects the Highway Trust Fund. If deficit reduction is also a focus of tax reform, the carbon tax should be part of the discussion.  Note that I'm not advocating for a carbon tax as I think there are some complexities in it and a significant producer of GHG emissions is carbon, such as using gasoline.  So, can existing excise taxes help to reduce GHG emissions?

A 3/15/13 infographic from the White House suggests creation of an Energy Security Trust with "revenue from profitable oil and gas companies."  It suggests that the funds be used for energy projects that will also help create jobs.  Why not also have it help fund the Highway Trust Fund?

What do you think? Should the gasoline excise tax be raised? If yes, when? What about switching to a VMT tax? What about a carbon tax?