As I explain in a new Tax Policy Center brief, the federal government and most states have per-unit gas taxes. That is, they tax the number gallons purchased, not the purchase price (as sales taxes do). That worked when Americans continuously increased their driving and gas consumption. But starting about 10 years ago, Americans started driving less and purchasing more fuel-efficient vehicles, thus buying less gasand eroding the tax base. That leaves one option for sustainable gas tax revenue: increasing tax rates. Surprisingly, policymakers have not overwhelmingly embraced this option.
The federal tax rate has not increased since 1993, and Congress quickly dismissed a rate increase when discussing the diminishing highway trust fund this summer. States have done somewhat better but not by much: 42 states and the District of Columbia have increased their per-gallon tax rate since 1993, but only 21 raised it by more than 5 cents. As a result, real per capita state motor fuel tax revenue declined from $145 in 1993 to $132 in 2011 (in 2011 dollars).
Massachusetts thought it had a solution to this problem. In 2013, lawmakers increased the gas tax rate by 3 cents to 24 cents per gallon—the state’s first rate increase since 1991. They also indexed the tax rate so it would automatically rise with inflation. Thus, no more 20-year gaps between increases: Starting in 2015, the rate would change annually with prices. The rate increase would have been about 1 cent next year. By comparison, gas prices in Massachusetts declined by 67 cents over the past six months.
It was a good idea. But it won’t happen. Massachusetts voters balked at the automatic increases and repealed indexing through a ballot measure on Tuesday.
That’s a problem for Massachusetts and a bad omen for gas taxes everywhere. Indexing is smart because it counteracts the eroding tax base by continuously, but slowly, increasing the tax rate—without politically perilous legislation. If the Massachusetts gas tax rate had been indexed to inflation from 1993 to 2013, it would have increased from 21 cents per gallon to 34 cents over that period. If gas consumption did not change, the state’s gas tax revenue in 2013 would have been more than 60 percent higher: $932 million vs. $569 million. That additional revenue would have supported transportation projects, and drivers might have spent a lot less time sitting on Route 128 or getting flat tires and busted axles fixed.
Gallons of gas taxed in Massachusetts increased every year between 1993 and 2004. But it stagnated after 2004 and peaked in 2007. With the fixed 21 cent per-gallon rate, 2013 revenue was $40 million below its 2007 peak. But if the rate had been indexed starting in 1993, 2013 tax revenue would have been more than $50 million higher than in 2007.
This estimate assumes no change in gasoline sales. While there would be some decline in consumption because of higher gas prices, research suggests that a 13-cent increase would have little effect on gas consumption. The 2013 estimate would decrease by less than $3 million if we take account of drivers buying less gas.
Critics of indexing argue that automatic increases are unjust, and that legislators should have to vote on each increase. That’s a good sound bite but a complete misreading of the situation. The per-gallon structure of the gas tax does not allow it to move with prices or the economy. If the rate is not increased, the effective tax rate declines every year. And given the fresh Bay State rebuke, legislative rate increases are probably unlikely. Instead, Massachusetts’ 3-cent rate increase (unaffected by the ballot measure) will temporarily increase revenue, but the trend line will remain flat or in decline in future years.
States ultimately face three options on transportation: raise more revenue through gas taxes, allocate general funds (and thus other taxes) to transportation, or scale back transportation projects. Massachusetts voters may have just removed an option.
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