Institute of Transportation StudiesUniversity of California at BerkeleyMarch 2003ISSN 0192 4095RESEARCH REPORTUCB-ITS-RR-2003-1A Dozen Reasons for Raising Gasoline TaxesMartin Wachs1Commentary prepared for PUBLIC WORKS MANAGEMENT AND POLICYA Dozen Reasons For Raising Gasoline TaxesMartin WachsUniversity of California, BerkeleyMotor fuel taxes at state and federal levels have traditionally been earmarked fortransportation investments, supporting road construction, maintenance, and operations,and increasingly public transit. Recently, elected officials have been reluctant to raisefuel taxes despite increases in the cost of transportation programs. Other forms ofsupport, especially borrowing and local sales taxes are playing larger roles intransportation finance. Raising fuel taxes would be more effective, efficient andequitable than the alternatives that are increasingly more popular.It is difficult to find support among elected officials for proposals to raise taxes ofany sort. Yet, from whatever direction I approach transportation policy, I uncoverreasons that motor fuel taxes should be higher. Unless the community represented byreaders of this journal make these arguments they are likely to be completely unknown togovernors, legislators, and citizens who have a great deal to gain from higher motor fueltaxes. Here are a dozen reasons for supporting higher motor fuel taxes.1. Motor Fuel Taxes Are Lower Now Than In The Past.The federal gasoline tax stands at 18.4 cents per gallon, and state gas taxes average20.3 cents per gallon among the fifty states, ranging from a low of 7.5 cents per gallon inGeorgia to a high of 29 cents per gallon in Rhode Island.1 In 1957 the average stategasoline tax was 5.7 cents per gallon. Had state gasoline taxes grown with the consumerprice index, the average for the fifty states would today be 9.7 cents higher than it is. TheCalifornia gas tax would have to be raised by 14.5 cents per gallon, while the Alabamatax would have to be 19.9 cents higher than it is just to have kept pace with inflation.Not only have these taxes failed to keep up with inflation, but roads carry more goodsand passengers then they did a few decades ago. Miles driven are a good measure of howmuch service we get from highways, and over time fuel economy has steadily improved.While new cars were doing well if they went twelve miles to a gallon in the fifties,average new car fuel efficiency is over twenty miles per gallon today, and even SUVs getbetter gas mileage than standard sedans did forty years ago. Taking into account both the 1 Taxes differ on gasoline and diesel fuel. Gasoline is used for simplicity, though similar analysis could bedone for diesel fuel.2decline in value due to inflation and increased fuel efficiency, the fuel tax in Virginia, forexample, today is 42.4% below what it was in 1957, when measured in terms of revenuein constant dollars per mile of driving.2. Fuel Taxes Are Well Below Levels In Other Countries.It is often enlightening to compare American policy with what is done in othercountries, recognizing that comparisons have their limits. On average among the fiftystates, the fuel tax including federal and state charges, is just below forty cents per gallon.It is well known that our fuel tax rate is among the lowest in the world. By comparison,the gas tax in Britain (fifty pence per liter) is equivalent to $2.80 per U.S. gallon. Thus,while the tax on fuel in the United States is approximately one-third of the wholesaleprice of gasoline, in England the tax is three times the wholesale pre-tax price. TheBritish government, which does not earmark fuel tax proceeds for use on highwayprograms, defends its much higher rates of fuel taxation on the basis of its contribution tothe reduction in traffic congestion, greenhouse gas emissions, and local air pollutants, andas a significant source of government revenues which it considers fairer and morepolitically acceptable than alternative forms of taxation. 3. Fuel Taxes Are Well Below Their Theoretical Optimum.Parry and Small recently attempted to arrive at an “optimal” gasoline tax,reasoning that the socially optimal charge would be one that levied against drivers the fullcosts their travel imposes upon society. They carefully enumerated the externalities ofautomobile travel, including the cost of congestion that drivers impose upon others, airpollution, and costs due to accidents. They took into consideration that charging theoptimal fuel tax would cause a change in the amount of driving. They concluded that theoptimal fuel tax in the United States should be about $1.01 per gallon, while the optimaltax in Britain should be about $1.34 per gallon. In other words, their findings suggestthat the American tax on motor fuels is far too low, while the British tax rate is much toohigh. The authors acknowledge that their calculations are extremely sensitive toassumptions, but their findings and those of many similar studies suggest that substantialincreases in the fuel tax are justified by considerations of economic efficiency.A survey of 40 leading US economists in 1998 found that that there is littleagreement among them as to which of thirteen national tax and regulatory reforms aredesirable public policies, with the exception that all support a proposed 25¢ per gallonfuel tax increase. This indicates that there is strong consensus among a wide range ofpolitical and professional perspectives that fuel and vehicle use are underpriced, and thatfuel tax increases provide overall economic development benefits.4. Drivers Show Remarkable Tolerance For Fuel Price Changes.Although politicians who would have to enact motor fuel tax increases seem loathto support even small changes in tax levels for fear of enraging the electorate, we see3quite often much larger changes in the retail price of gasoline which seem to have onlysmall impacts on the attitudes of consumers. The pump price of gasoline and other motorfuels depends on changes in response to many factors in addition to tax rates: changes incrude oil prices, seasonality in the relationship between supply and demand, unusualgeopolitical events. Beyond this, there are variations in price from region to region thatreflect different market conditions and also respond to costs induced by differences inenvironmental conditions and federal regulations that specify changes in the formulationof fuels for different seasons at different
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