Gasoline Taxes in America

BACKGROUND PAPER October 2007, Number 56 Paying at the Pump: Gasoline Taxes in America by Jonathan Williams have eroded the original intent of gas taxes. In Executive Summary all too many instances, benefit-principle Over the past century, Americans have taxation has taken a backseat to political witnessed a marked increase in mobility pandering. For instance, current federal through safe and reliable roadways. This highway legislation authorized over 6,000 improved mobility has undoubtedly increased earmarks from the highway trust fund. Some the overall quality of life in the United States. of these went to legitimate transportation Gasoline taxes have provided the required programs, but others were earmarked for funds to build the roads that brought America items such as the infamous “bridge to into the transportation age. nowhere.” Today, gasoline tax revenue is spent on everything from public education and Gasoline taxes are often mentioned as the museums to graffiti removal and parking best form of taxation from an economic garages. perspective because they provide a system of road funding by simply charging road users when they fill up their tanks. This “user tax” adheres to what economists refer to as the From the very inception of gasoline benefit principle of taxation. taxation, public officials have faced Early gasoline taxes in the states were temptation to divert gasoline tax explicitly created in an attempt to charge road users for the privilege of using roads. How- revenue to projects that are only ever, from the very inception of gasoline tangentially related to taxation, public officials have faced temptation to divert gasoline tax revenue to projects transportation and that are often that are only tangentially related to transpor- purely politically motivated. tation and that are often purely politically motivated. When lawmakers do overcome the temptations to squander gasoline tax funds, In light of the recent bridge collapse and instead use the revenue strictly for road in Minnesota, lawmakers would be wise construction and maintenance, gasoline taxes to carefully scrutinize the practice of using can serve as a reasonable tax. gasoline tax dollars for anything other Gasoline taxes have been in operation for than legitimate road construction or repair. well over 80 years in the United States. The reputation of gasoline taxes serving Unfortunately, the years of political pressure as user fees has been tarnished with the Jonathan Williams wrote this study while an economist at the Tax Foundation. Now at the American Legislative Exchange Council (ALEC), he serves as Director of the Tax and Fiscal Policy Task Force. mismanagement of transportation funds through- believe that highway taxes ought to be used to out the United States. Therefore, if we are ever to fund highway needs.2 In recent years, this linkage restore public trust to our system of highway between gasoline taxes and road spending has finance, there must be proper accountability and been weakened considerably by projects like the oversight to avoid more waste and abuse of “bridge to nowhere,” leading many to question current resources. the rationale for current gasoline taxes. Not only do benefit-principle taxes represent The purpose of this study is to clarify the sound economic policy – they are popular with proper role of gasoline taxes and highlight ways in American drivers as well. History has clearly which state and federal gasoline taxes have demonstrated that the most popular gasoline taxes deviated from their proper role in recent years. have been those which directly linked gasoline tax revenue with road spending. If gasoline taxes are Theory of Gasoline Taxes to survive as the “best tax,” the benefit principle The basic justification for gasoline excise taxes is must be enforced. that they satisfy what economists call the benefit principle of taxation. This is a longstanding justification for the imposition of taxes that dates Introduction back to at least Adam Smith’s Wealth of Nations. When the November 6, 2005, edition of Parade The benefit principle is also widely accepted in featured a cover story on the plan to spend over modern public finance theory as representing $220 million on a bridge that would connect a sound tax policy. small town in Alaska to an island with 50 inhabit- Simply stated, the benefit principle tells us ants, Americans took notice. This “bridge to that consumers of government services should be nowhere” became a national rallying cry against taxed in proportion to the benefit they obtain wasteful spending practices in Washington. After from those services. For instance, it would make the GOP lost control of Congress in the 2006 little sense to take income tax payments from midterm elections, columnist George Will wrote: elderly retirees to pay for roads they will never use. “Republicans now know where the ‘Bridge to Similarly, if the benefit principle is to be re- 1 Nowhere’ leads: to the political wilderness.” spected, revenue extracted from motorists in the Even with all the scrutiny over pork barrel form of gasoline taxes should be used exclusively spending practices, rarely did news stories report to fund roads. how the federal government obtained the revenue When lawmakers consider taxing gasoline to fund the politically beleaguered bridge project. according to the benefit principle, they use the Since the bridge was included in the 2005 following logic: Gasoline usage can be reasonably transportation bill, it was funded through the correlated to the weight of vehicles and the Federal Highway Trust Fund – a large majority of mileage they travel. Wear and tear on roads can which comes from federal gasoline tax revenue. also be reasonably correlated to the weight of For nearly a century, gasoline taxes have vehicles and the mileage they travel. Therefore, played a central role in financing America’s gasoline usage can plausibly serve as a proxy for roadways with tax dollars collected from the damage done to public roads. Consequently, it can motorists who utilize them. Today, the federal be fair and efficient for government to tax gasoline government taxes each gallon of gas 18.4 cents per to raise funds that are depleted by road-related gallon. In addition, U.S. states and various expenses. municipal governments levy gas taxes of their If the revenue from motorists’ gasoline taxes is own. As a result, the combined burden of local, then directed exclusively to pay for the roads they state and federal gas taxes costs American drivers use, gasoline taxes can serve as a “user fee” and the 46.9 cents per gallon on average. In fact, the benefit principle is met. When taxes are levied in average American now pays $269 dollars annually direct proportion to the benefit the taxpayer in gasoline and diesel taxes. receives, economists refer to this as an efficient Historically, gasoline taxes have been justified distribution of a public good.3 on the grounds that the motorists who pay them In theory, economists generally refer to also benefit from improved roadways and trans- gasoline taxes as one of the best forms of taxation. portation. Even today, 89 percent of Americans 1 See The Washington Post, November 9, 2006. 2 See Gabriel Roth, “A Road Policy for the Future,” Regulation, Spring 2003. 3 Richard E. Wagner Ph.D., “State Excise Taxation: Horse-and-Buggy Taxes In an Electronic Age,” Tax Foundation Background Paper, No. 48 (May 2005). 2 In some respects, solely relying on the benefit the first state in the nation to place a tax on principle of taxation will yield an outcome that gasoline purchases. Oregon lawmakers who parallels the market pricing of private goods.4 overwhelmingly supported the new levy presented Taxing Gasoline: The Early Years in Table 1 Early Gasoline Taxes in the States the States Initial Since the invention of the automobile, safe and State Year of Enactment Rate reliable roadways have been in high demand by Oregon 1919 1¢ American motorists. With public pressure on Colorado 1919 1 New Mexico 1919 1 lawmakers to create and maintain a reasonable North Dakota 1919 1 transportation infrastructure, road funding has Louisiana 1920 1 also been indispensable for officials. Kentucky 1921 1¢ Arizona 1921 1 A century ago, governments generally Arkansas 1921 1 Connecticut 1921 1 received their road funds from property taxes, poll Florida 1921 1 5 taxes, and labor levies. Large-scale production of Georgia 1921 1¢ automobiles started shortly after 1900 in the Montana 1921 1 North Carolina 1921 1 United States and thus began the long relationship Pennsylvania 1921 1 between automobiles and taxes levied to pay for Washington 1921 1 roads. Maryland 1922 1¢ Mississippi 1922 1 Even before Ransom Olds and Henry Ford South Carolina 1922 2 opened assembly lines for mass production of South Dakota 1922 1 Alabama 1923 2 automobiles in the United States, governments California 1923 2¢ were already beginning to find ways to tax this Idaho 1923 2 Indiana 1923 2 innovative form of transportation. In 1901, the Maine 1923 1 city of New York began to charge drivers a Nevada 1923 2 registration or license fee. By 1903 the state of New Hampshire 1923 1¢ Oklahoma 1923 1 Missouri had harnessed this new revenue source, Tennessee 1923 1 dedicating the revenue to a state highway fund.6 Texas 1923 1 Utah 1923 2.5 In the following years, states and localities Vermont 1923 1¢ increasingly began to rely on user fees to help fund Virginia 1923 3 roads. By 1914, all states had instituted motor West Virginia 1923 2 Wyoming 1923 1 vehicle licensing and roughly 90 percent of their Delaware 1924 2 revenue was spent on road “construction or Iowa 1925 2¢ 7 Kansas 1925 2 maintenance.” Michigan 1925 2 As public use of the automobile became Minnesota 1925 2 Missouri 1925 2 increasingly popular and affordable, public Nebraska 1925 2¢ demand for roads exploded.

Load more