How Fuel Efficiency and Low Gas Taxes Created Today’s Traffic Jam
Midway through his first term, President Dwight Eisenhower issued a call for construction of a massive system of interstate highways to replace the nation’s obsolete and inadequate road network. Although the idea received enthusiastic support from manufacturing and labor interests, the bill was defeated overwhelmingly in the House, largely on the question of how to pay for such a large long-term program. An increase in the gasoline tax had always been an element of the funding mechanism, but following the loss in the House, Treasury Secretary George Humphrey broke the logjam with a proposal to allocate gas tax revenue to a Highway Trust Fund that would finance construction on a “pay as you go” basis. The interstate system was launched in 1956.
What could go wrong? Cars were rolling off assembly lines, people were driving more, and demand for gasoline was on the rise. A penny increase in the 3-cent-per-gallon tax was sufficient to cover the cost of construction and maintenance of the system well into the 1970s, when conditions changed significantly. Oil price shocks altered consumer behavior in terms of miles driven and types of cars purchased. To reduce dependence on imported oil, government policies pushed automakers to increase fuel efficiency. During the following 40 years, despite sustained periods of relatively low gasoline prices, the rate of growth in gasoline consumption slowed. At the same time, demand for alternative transit options grew and the cost of highway and urban rail construction rose.
Each year the squeeze gets tighter. Federal fuel taxes, at 18.4 cents per gallon for gasoline and 24.4 cents for diesel fuel, provide about 90 percent of the funds available to the Trust Fund, but the $30 billion annual contribution is not enough to cover expenses. Over the past five years, Congress has transferred $53 billion from general revenue to the Trust Fund to cover the shortfall. According to the Congressional Budget Office, an additional infusion of $25 billion will be required by 2015. Achievement of the Corporate Average Fuel Economy standards announced by the Obama administration last year would hasten a range of technological changes, including smaller engines, lighter materials, more plug-ins, and small battery hybrids, further reducing fossil fuel consumption and Trust Fund revenue.
Unsurprisingly, no magic wand will banish the phrase “higher taxes” from conversations about easing the infrastructure funding crisis. In Washington, anything that smacks of a tax increase makes progress hard to imagine.
A simple solution would be to raise the gas tax enough to limp along for a while and fix the worst bridges and potholes. CBO estimates that an increase in the gas tax of 10 cents per gallon could maintain current funding levels. Others suggest raising the tax and indexing it to offset construction cost inflation and fuel efficiency gains. With gas prices currently averaging about $3.50 per gallon nationally, a 3 percent increase isn’t extreme. The public’s antipathy toward higher taxes, particularly those hitting nondiscretionary expenditures, however, almost certainly makes that proposal a nonstarter.
States rely on gas taxes and, facing the same problems, have come up with creative responses. Virginia replaced its 17.5 cent per gallon gas tax with a wholesale sales tax of 3.5 percent on gasoline and 6.0 percent on diesel. The general sales tax was increased 0.3 percentage points, with the additional revenue dedicated to funding transportation projects. While this approach has made revenue less sensitive to declining consumption, in some ways it is a bet on continued high prices. A significant drop in prices, as seen in the 1980s, could lead to revenue shortfalls. Moreover, if the federal cents-per-gallon tax were replaced with a sales tax, oil price swings could destabilize revenue and hinder long-term financing of projects by the Trust Fund.
Shifting from a fuel-based tax to one that charges drivers for vehicle miles traveled (VMT) would preserve the user fee concept in transportation financing for both highways and mass transit. The VMT would also equalize the disparity between gas taxes paid by different types of cars. Oregon is experimenting with a voluntary miles driven billing system, and other states are considering legislation testing the VMT waters. The high-tech dream scenario for VMT would be to link the increasingly sophisticated electronics in a car’s operating system with GPS to track a vehicle on any road and bill the driver/owner for an imputed infrastructure cost depending on where the driving occurred.
Of course, one man’s dream is another’s nightmare. Privacy and civil liberty issues complicate VMT’s chances. Mandatory tolls, like mandatory healthcare coverage, are unlikely to be popular. And if data collection by the National Security Agency is suspect, tax bills based on government tracking of drivers’ whereabouts would face an uphill climb. Proponents play down these concerns and note that dynamic toll pricing is already in use, and enhanced electronic transponders might be acceptable substitutes for government tracking devices.
Analysts at the Brookings Institution have posed a very different solution—a National Infrastructure Bank charged with financing major highway and other transportation construction. The NIB would be capitalized with proceeds from “a one-time tax reduction on repatriated corporate profits, temporarily decreasing the standard corporate tax rate to approximately 10 percent, and capped at $500 million per firm.” The authors estimate that the tax holiday would generate nearly $25 billion to be used to leverage private investment in important infrastructure projects. The plan would build on existing public-private partnership structures to fund regional and inter-jurisdictional projects that tend to fall through the cracks of public financing. To be viable, the projects would have to provide a revenue stream through user fees.
The NIB would not replace the current Highway Trust Fund, nor would it solve the problem of declining gas tax receipts. It would stimulate increased investment in more than just highway infrastructure and supplement existing funding mechanisms. But the tangled politics of enacting a profit repatriation tax break and establishing the NIB are not easily unraveled. As the current situation in Washington illustrates, complex political problems can be simplified to the point of paralysis. We can only hope that politicians will take the steps necessary to pay for the infrastructure America needs.