The fiscal "grand bargain" and the gas tax

The countdown to the so-called fiscal cliff is on, with President Obama and lawmakers on both sides of the aisle weighing in on the budget negotiations. If a deal gets done, many experts are rightly wondering if a gas tax hike will be part of the grand bargain. The federal gas tax, which is used primarily to build and repair roads, bridges, rail lines and other transportation infrastructure, raises about $32 billion a year. But that's not enough since the government allocates about $50 billion a year to states and towns to help cover transportation costs. The gap is usually filled with money from general funds or must be borrowed. 

"Establishing a sustainable resource base for transportation needs to be part of any grand bargain," said Emil Frankel, a former transportation expert in the George W. Bush administration and now director of transportation policy at the Bipartisan Policy Center. "In the short run, raising the gas tax is the best way to do that."

Frankel was quoted in a CNNMoney story which also noted:

Raising the gas tax was one of the recommendations of the Simpson-Bowles debt reduction plan in 2010. The plan called for a 15 cent-a-gallon hike to the gas tax, a level that would basically cover the current shortfall in the transportation budget.

Others went further. In a 2010 letter to the commission Delaware's Democrat Senator Tom Carper and former Ohio Republican George Voinovich proposed a 25 cent-a-gallon hike in the gas tax, with the additional 10 cents a gallon going toward debt reduction. The pair estimated it would generate $83 billion over five years to chip away at the debt, and an additional $117 billion for road repairs.

I've blogged on this topic many times, but as a refresher: the 18.4 cent/gallon gas tax hasn’t been increased since 1993. It's purchasing power has been dimished by inflation rates and the rising cost of construction. Moreover, as vehicles have become more fuel efficient, requiring fewer fill-ups, less gas tax is being paid for each mile driven.

It would seem that increasing the user fee to pay for our roads and transit is a no-brainer. Just about everyone accepts that raising the gas tax is good policy, however most elected officials consider it bad politics. Now that the 2012 election is over and lawmakers have turned their attention to trying to avoid the dreaded fiscal cliff through a budget deal, perhaps they will finally consider increasing the federal gas tax -- or at least indexing it to inflation or perhaps some other method of generating new transportation revenue. (The Onion offers up its own unique suggestion, the Traffic Jam 2013 summer concert series.)

There are certainly signs of hope. The new chairman of the House Transportation & Infrastructure Comittee, Rep. Bill Shuster (R-PA), has recently stated that he's open to nearly every approach to achieve a dedicated and sustainable transportation-related revenue source, including an increase of the federal gas tax.

[UPDATE: Incoming House T&I Chairman Bill Shuster, appearing on The Heritage Foundation’s “Istook Live” show on Dec. 13, reiterated that a gas tax increase needs to be on the table as Congress looks at ways to boost infrastructure funding. “Transportation affects everything on a daily basis,” he said. He also defended the federal role in transportation, saying “it’s enshrined in the Constitution.” He also said he sympathizes with those who argue for transit’s continued share of gas tax dollars. “The logic you can apply to it is that people on transit are off the roads,” he said. “I can understand some of that logic.”]  

Why the Gax Tax?

According to the Institute for Taxation and Economic Policy, the federal gas tax was originally created in 1932 to reduce the federal deficit. Since the advent of the Interstate Highway System in 1957 its purpose has shift ed almost exclusively to funding transportation. As noted by ITEP:

The federal gas tax is a critical source of funding for the nation’s transportation system, but its design is fundamentally fl awed. In recent years, the consequences of those flaws have become increasingly obvious, as the federal government has struggled to fund a 21st century transportation network with a gas tax that has predictably failed to keep pace with the nation’s growing infrastructure needs.

ITEP has a very useful primer explaining how every state also levies taxes on gasoline and diesel fuel. These taxes are an important source of state revenue—particularly for transportation—but their poor design has resulted in sluggish revenue growth that fails to keep pace with state infrastructure needs. Two main factors are to blame for the inability of combined state and federal gas tax revenues to cover the costs of transportation: (1) more fuel-efficient vehicles on the road today require fewer fill-ups, meaning less taxes are being collected and (2) repairing and replacing America's out-dated, delapitated transportation network (bridges, roads, railways) is expensive --especially since gas taxes typically aren't even indexed to keep pace with inflation. (In other words, gas taxes usually don't go up but construction costs always do.)

ITEP spells out the consequences:

Lawmakers’ failure to deal with rising fuel-effi ciency and construction cost inflation has led to big declines in state gas taxes. When viewed as a percentage of families’ household budgets, state gas taxes are lower than at any point since the widespread adoption of those taxes at the end of the 1920’s. Focusing on the more recent past, ITEP found that state gas tax rates, adjusted for construction cost infl ation, are a full 17 percent lower today than they were in 1990. That’s the equivalent of a 5 cent gas tax cut on every gallon purchased—though in some states the decline has been signifi cantly larger.

States Seeking Dollars and Sense

As noted above, revenues generated from taxes collected at the pump by the federal government and the states fall woefully short of what is needed to fully fund our nation's transportation needs. Desperate for transportation dollars, some states are looking at other potential funding sources, such as tolls on interstates. But the better solution to the fiscal crunch is to add some pennies to every gallon of gasoline we purchase. 

An editorial in The Washington Post earlier this year put it bluntly:

The best way to insulate the country from price volatility, and everything else that makes America’s oil dependence unattractive, is to use less. And the best way to make that happen is to raise the federal gas tax.

The same paper chimed in with another editorial just today, endorsing a legislative proposal in Virginia that would raise $733 million annually by levying a 5 percent surcharge on the wholesale price of fuel and imposing a sales tax on car repairs, car washes and other services related to transportation (which are currently exempt). Alas, Govenor McDonnell, along with House Republican leaders, have labeled this rather modest plan as radical because it seeks to boost much-needed revenues through user fees -- or taxes.

Unlike in Virginia, the governor of Minnesota is pushing to hike local sales taxes, gas taxes and vehicle fees to raise $20 billion over 20 years for transportation. Every state is staring at the same fiscal crunch. Where the rubber meets road is how state leaders will choose to confront their own transportation crisis. Raising the federal gas tax won't solve the problem for all of the states, but it would help a whole lot. 

Less Talk, More Action on Gas Tax

Last week I attended a panel discussion billed as a post-election analysis on  transportation policy, sponsored by the Bipartisan Policy Center. About two minutes into the discussion, when the topic of transportation financing was raised, the talk turned to the gas tax. All of the distinguised panelists -- ranging from former U.S. Department of Transportation officials to the top transportation official at the U.S. Chamber of Commerce -- agreed on the obvious solution: increase the gas tax.

I particularly liked the analogy shared by Doug Foy, a lawyer and energy consultant who served as the first Secretary of Commonwealth Development in the administration of former Massachussetts Governor Mitt Romney. Mr. Foy talked about the important networks we all use, enjoy and rely upon -- from the cable and fiber optic network to the energy grid to the transportation system. He noted that his own annual bill for cell phone service is over $2000; his cable/internet bill comes in at over $2000 per year; his electric/gas power bill is over $2000 too; and his utilities (water and sewer) topped $1000. Yet the grand total for what he paid last year in federal and state gas taxes (totaling about .40 cents per gallon) to use the transportation network was about $160.

You read that right. You can even calculate your own gas tax costs. As for me, I put roughly 11,000 miles on my car last year. The car averages 35 mpg. That means the federal gas tax sucked up only about $56 of all the money I paid to fill up. That's a pittance compared to what each of us pays for those other vital networks. Wouldn't we all gladly pay more for the crucial role transportation plays in helping us carry on our daily lives? Yet most people -- largely without reason -- flatly reject the notion of being asked to pay a few cents more per gallon of gasoline. Meanwhile, our system crumbles and our government debt deepens to fill the funding gap every year just to maintain our transportation system.

[UPDATE: Transportation as Utility]

Foy pointed out that unlike the cable or water bill, you can't simply turn off the transportation service. "People will drive those roads no matter whether they pay enough to maintain those roads or not," he said. He added that we have got to get people to understand that by scope transportation is by far the largest of all the networks we all utilize and it's enormously expensive to maintain. "They hate the gas tax because they think it's gigantic," Foy said, "when in fact it's tiny compared to the true cost. Truly tiny." 

Obviously, few people want to pay more at the pump but that is the sure-fire way for us to foot our transportation bill. It is also the best way to protect ourselves from future price spikes since reducing our demand for oil is far more realistic than increasing fossil fuel supplies. But most consumers don't think about that -- they generally pine for the "good old days" when gas prices were much lower than prices today. Let's not forget though that "cheaper" gas also fueled higher consumption, deeper dependence on foreign oil, gas guzzling vehicles, "sprawl" and traffic -- while discouraging the use of public transportation and the development of alternative fuels. 

In the summer of 2008 prices at the pump skyrocketed to more than $4 per gallon and have remained near that level ever since. High fuel costs are likely a reason why these days ridership on public transportation has risen to levels not seen since the 1950s, car ownership has dipped among the younger generation, and polls are finding that more people prefer to live closer to their jobs and in transit-friendly communities than in the suburbs and beyond. These are positive trends that illustrate how some consumers are adapting to the higher gas prcies which are here to stay.

While no one enjoys the prospect of paying even more at the pump with a higher gas tax, it is important to remember that some of the subsequent benefits would include boosting demand for green technology, such as alternative fuels and electric vehicles; spurring more investment in transit and walkable communities; a reduction in smog-forming air pollution and greenhouse gases contributing to climate change; and an increase in our national security that can result from breaking America's addiction to oil. Despite these benefits, the most compelling reason to support an increase in the federal gas tax rate is that it offers the best hope for actually paying for the transportation system we've come to expect and which we all need. 

When all is said in done, the federal gas tax is a bargain. All the more reason raising it should be considered in any grand bargain that saves us from falling over the fiscal cliff. It's also worth noting that usually when the gas tax was increased in the past it was always done as part of a big budget deal. Now is the perfect time to revisit this potentially huge revenue raiser.