Raising the Gas Tax for Deficit Reduction

Few issues incite more controversy and clamor than the national “gas tax”. With the national deficit surpassing $13 trillion, some have eyed raising the national gas tax as a strategy for deficit reduction.

Throughout history the gas tax has been utilized as a deficit reduction mechanism. When the gas tax was first conceived in 1932, for example, President Hoover used the tax revenues as a temporary means to balance the Depression-stricken economy, although the tax was made permanent under President Roosevelt. In 1990 and 1993, Presidents Bush and Clinton also increased the national gas tax in part to reduce the national deficit. So are we at that point again today of raising the gas tax as a means to balance the budget?

Comparing 1990 and 1993 deficit levels with our current fiscal condition is revealing. In 1990, the national debt was 55.9% of GDP, while in 1993, the debt level was 66.1% of GDP. As of June 2010, our national debt is a staggering 90% of our GDP. Therefore, comparatively speaking, raising the gas tax today for deficit reduction purposes would seem economically reasonable given how our deficit situation is far more pronounced than it was in either 1990 or 1993. On the other hand, a small increase would have much less of an impact on deficit reduction because of the size of the deficit.

While current economic conditions would not make the decision to raise the gas tax as a means to lower the deficit unusual, a lack of political will prevents such an increase. Congressmen on both sides of the aisle have refused to even consider raising the tax in the face of the 2010 midterm elections, and Transportation Secretary Ray LaHood has stated publicly that the Obama administration is not considering raising the gas tax. Other factors, like the perceived high ($2.75/gallon nationally) though historically low price of gas, inequity faced by rural and poorer families if the tax was increased, and the anti-tax movement have prevented any momentum for an increase from materializing. Unless there is a shift in administration policy and a real push on their part, these factors are unlikely to be overcome.

Therefore, while we might be far past-due for an increase in the gas tax in order to reduce current deficit levels, and maybe even fund a transportation bill, the political environment coupled with the chilly public opinion towards an increase is likely to prevent it from occurring in the near future even in the face of cries to lower the deficit.

New Debate about Vehicle Miles Travelled Fee

Recent weeks have seen renewed debate about how to pay for transportation investment. The National Financing Commission released a report recommending an increase in the gas tax and a transition in the next decade to a system based on vehicle miles travelled (VMT). Around the same time, Transportation Secretary LaHood commented that he was willing to consider a VMT charge as a revenue mechanism – a comment that the Obama administration quickly smacked down and backed away from. This was a surprising move that does little to advance a reasonable discussion of how to actually pay for transportation investment.

The basic issues, as we have partly laid out in previous posts, are these:

1. There is a popular myth that the public fully pays for transportation infrastructure via the gas tax. This is false. As the Finance Commission reports, people pay nowhere near the full direct and indirect costs of transportation.


2. Transportation infrastructure is not only deteriorating, it is not being used efficiently. Charging people more of the actual cost of their use can preclude the need for more investment. Either people pay upfront with higher fees, or they pay later through higher general or indirect taxes, and it is cheaper to pay upfront.


3. If we do not raise enough revenue through user fees like a VMT charge, we face the issue of whether to spend money from the general fund. This would be a foolish approach because it severs the connection between payment and use.


4. The gas tax is unsustainable. As the primary revenue source, in the short term it needs to be increased if we want to invest adequately in transportation. In the medium term (5-20 years), it needs to be phased out because changing technologies will limit the revenue it raises.

So we arrive at discussion of the VMT charge. The administration’s dismissal of a VMT charge flies in the face of broad consensus in the transportation sector. Without proposing an alternative revenue source, it seems that the administration either does not believe that more money should be invested in transportation, or that more investment should be paid for from the general fund. The first possibility is contradicted by the administration’s own emphasis in the stimulus bill of the public value of investing in transportation. The second possibility is simply poor policy.

At a time when the country needs to focus on efficient spending, a policy that funds transportation from the general fund is the most costly and least efficient approach. It voids the principle of “user pay” and ensures that transportation infrastructure will be used in the most inefficient way (i.e. continued traffic congestion).

It is not that a VMT charge is the only viable user fee available, but it is a logical and reasonable one. To dismiss it off the cuff without a discussion of the alternatives is to preempt a thoughtful debate of best practices. For those reasons, we have certainly not heard the last of a VMT charge.