Seven things you should know about gas taxes in 2010

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American highway construction and repair is dependent on the Highway Trust Fund, which is largely generated through taxes on auto and truck fuel consumption. The tax has risen significantly in the past 30 years, but fuel taxes imposed by the Federal government date back to the Depression era.

This is a primer on how the gas tax works, where the money is spent, how gas taxes were used to reduce budget deficits – and may need to be reconfigured in the future as vehicles adopt ever more stringent fuel efficiency standards.

1. What is the current gas tax per gallon?

Gas taxes vary by state and county, but the Federal Highway Motor Fuel tax is applied to every drop of gas sold in the U.S., and is currently at 18.4 cents per gallon. Annual consumption is approximately 132,649,310,000 gallons/year, putting revenues for the Highway Trust Fund (the primary source for highway and bridge building and maintenance) at more than $24.4 billion (as detailed below, there are other sources of this funding as well).

2. Why do gas taxes differ from state to state and even county to county?

In addition to the federal gas tax, states and counties can raise additional revenues for their own use with extra taxes on gas.

The mean state gasoline tax was 29.3 cents per gallon in the first quarter of 2010, plus the federal 18.4 cents per gallon tax, bringing the mean total to 47.7 cents per gallon. State variances on gasoline taxes are significant: Following are the top ten and bottom ten states by the total of federal plus state taxes paid per gallon:

State Taxes/gallon
Top Ten
California 67.0
Hawaii 63.5
New York 63.3
Connecticut 61.0
Illinois 58.8
Washington 55.9
Michigan 54.2
Indiana 53.2
Florida 52.8
Nevada 51.5
Bottom Ten
Virginia 38.0
Arizona 37.4
New Mexico 37.2
Mississippi 37.2
Missouri 35.7
Oklahoma 35.4
South Carolina 35.2
New Jersey 32.9
Wyoming 32.4
Alaska 26.4

Taxes on diesel fuel averages higher: the mean state tax was 26.6 cents per gallon plus 24.4 cents per gallon for the federal tax (a total of 50.8 cents per gallon). The variable tax rates on diesel roughly corresponds with low and high states list for gasoline, with notable differences between regions:

Region Taxes/gallon
West 61.5
Mid Atlantic 58.3
Northeast 55.6
Midwest 52.5
Mountain 46.0
South 44.7

3. How are gas tax revenues used?

Revenues from fuel taxes are deposited into the Highway Trust Fund, which in turn is distributed to several accounts. Percentages to those accounts vary by fuel type, but the majority (approximately 83 to 87 percent) is deposited into the Highway Trust Fund account. This is used on road construction and maintenance. Most of the remainder – approximately 11 to 15 percent – goes to the Mass Transit Account. About 0.1 cents per gallon goes to the Leaking Underground Storage Tank Trust Fund. (Believe it or not, this is referred to as the LUST Trust Fund by the Federal Highway Administration.)

The specific oversight of federal surface transportation funding is SAFETEA-LU, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A legacy for Users. This was signed into law in 2005 by President George W. Bush. Features of SAFETEA-LU are:

  • Funding addresses safety, traffic congestion reduction, improved freight movement efficiency, increased intermodal connectivity and environmental protection.
  • Focus on transportation matters of national significance, while allowing state and local transportation decision making where appropriate. This includes permission to states (singly or in a compact of two more more) to increase collection of tolls on Interstate highways, bridges and tunnels.
  • The Equity Bonus Program ensures that states are guaranteed 90.5 percent of funds (2005-2007) and now 92 percent (since 2008) are returned to the states in which they are generated.

The nature of the bill is that it needs frequent reauthorization. It is currently approved through the end of 2010.

4. Are there other sources of funds for the Highway Trust Fund?

Under current laws, the tax on gasoline is only one part of what funds the Federal Highway Trust Fund. Other sources:

Fuel/non-fuel sources Tax rate Highway allocation Mass transit allocation
Gasoline 18.4 15.44 2.86*
Gasohol 18.4 15.44 2.86*
Liquefied petroleum gas 18.3 16.7 2.13
M85 (85% methanol) 9.25 7.72 1.43
Compressed natural gas 48.54** 38.83 9.71

*0.1 cents/gallon of gasoline, gasohol, diesel fuel and M85 goes to the Leaking Underground Storage Tank Trust Fund.
** Cents per thousand cubic feet

Non-fuel sources Tax rates (all goes to the HTF)
Tires No tax under 3,500 pound load capacity 9.45 cents per 10 pounds capacity over 3,500
Truck/trailer sales 12 percent of sales price (trucks over 33,000 pounds and trailers over 26,000)
Heavy vehicle use Trucks (55,000-75,000 pounds): $100 plus $22/1000 pounds over 55,000 pounds; over 75,000 pounds = $550 annually

5. What is America’s history with gas taxes?

The first gas tax in American history was imposed by President Herbert Hoover, in 1931 (one cent per gallon of gas and fuel oil) as part of an overall deficit reduction bill that also included taxes on amusements, firearms, cameras, furs, electricity, telephones, jewelry, refrigerators and car tires, along with increases in estate, capital gains and corporate taxes. It was not explicitly imposed to fund road building and repair, as auto ownership was limited at the time. As is evident by the other items taxed, this was essentially a luxury fee.

This tax on gas was meant to be temporary, set to expire at the end of June 1933. But by then, President Franklin Roosevelt had passed the National Industrial Recovery Act of 1933, which both extended and increased the tax to 1.5 cents per gallon (the half-cent increase was rescinded a year later). The tax continued to be considered temporary for ten years, until 1941, when the tax was made permanent and increased again to 1.5 cents per gallon as an anticipatory build-up to World War II.

After World War II, the tax was challenged by the auto, oil and travel industries. States also claimed that if anyone was to tax gas (and use the proceeds), it should be them. A state governors’ conference argued for elimination of the federal gas tax and instead allow the states to charge the tax by an equal amount. America’s involvement in the Korean War, beginning in 1951, overrode that idea and extended the federal tax until 1954.

President Dwight Eisenhower fought to extend the tax renewal each of the first four years of his presidency, long enough for the tax to become part of the growing movement for a national interstate highway system. Debate in hearings before Congress that preceded passage of the Federal-Aid Highway Act of 1956 reveals how control of the tax was finally ceded to the federal government by the states.

“The approach here is simply a realization of the practical political facts of life that the Government is not going to get out of that gas-tax field. So it is a question of relaxing and enjoying it, I think, rather than changing our minds.”

Said Wisconsin Governor Walter J. Kohler, Jr. in that hearing:

“I would like to point out that, so far as I know, the governors still, if polled, would adhere to their position that the Federal Government should get out of the gas-tax field and leave that to the States.

“The approach here is simply a realization of the practical political facts of life that the Government is not going to get out of that gas-tax field. So it is a question of relaxing and enjoying it, I think, rather than changing our minds.”

With the act, the tax was raised to 3 cents per gallon. Those revenues, along with excise taxes on tire rubber, tube rubber, and purchases of new trucks, buses and trailers were deposited into the new Highway Trust Fund (which is simply an accounting of dollars that are put into the general treasury).

The tax was raised later in Eisenhower’s term to 4 cents per gallon, which President John Kennedy affirmed with the Federal-Aid Highway Act of 1961, which stipulated it remain at that level through September of 1972. In fact, it remained at that level until the Surface Transportation Assistance Act of 1982, signed by President Ronald Reagan, which raised it to 9 cents per gallon. An amendment under Reagan in 1986 added 0.1 cents per gallon to fund clean up of leaking underground storage tanks (the LUST fund).

The Omnibus Budget Reconciliation Act of 1990, under President George H.W. Bush, added 5 cents (bringing it up to 14.1 cents per gallon), however 2.5 cents were siphoned off to fund general deficit reduction.

The Omnibus Budget Reconciliation Act of 1993, signed by President Bill Clinton, added 4.3 cents per gallon to the tax, effective bringing the total tax to 18.4 cents per gallon. But the entire increase went to deficit reduction, adding nothing new to the Highway Trust Fund. Four years later, President Clinton approved the Taxpayer Relief Act of 1997, which redirected the 4.3-cent increase of 1993 back to the Highway Trust Fund.

In 2010, the federal gas tax remains at 18.4 cents per gallon.

6. Is the HTF/gas tax revenue fairly distributed?

This is the subject of differing opinions.

The Department of Transportation, Federal Highway Administration statistics (through 2007, the last year available) that compare dollars paid into the system versus those spent, by state, indicate some states benefit more than others. Following are the top five winners and losers in this equation:

Winners:

  1. District of Columbia
  2. Alaska
  3. Rhode Island
  4. Vermont
  5. Montana

Losers:

  1. Texas
  2. Utah
  3. North Carolina
  4. Nevada
  5. Indiana

Note: the “loser” states are all relatively close in the ratio of their payments-in versus funding-out of the system. But numbers for the “winners” show highly skewed ratios: DC and Alaska, for different reasons, receive 5 and 3.6 times what they pay into the system. Both are characterized by relatively little gas consumption relative to road and public transportation funding.

The Environmental Working Group, a non-profit group focused on public health, asserted in 2003 that a metro-area analysis (city by city instead of state by state) of how gas tax funds shows an allocation that disfavors cities. Their claim:

“A first ever investigation of metro area transportation spending by the Environmental Working Group found that commuters in 176 metropolitan areas paid a total of $20 billion more in federal gas taxes than they received in federal highway trust fund money for both transit and highways from 1998 through 2003. Taxpayers in fifty-four metropolitan areas lost an estimated 100 million dollars or more during the 6-year period analyzed … members of Congress [fight] to ensure that states receive federal transportation funds equivalent to what the states contribute in gas taxes.

“Local transportation spending, however, has a far greater impact on congestion, air pollution, and sprawl. The top money losers were drivers in Los Angeles/Riverside, where there was an estimated $1.16 billion shortfall in federal highway trust fund expenditures compared to gas taxes paid during the six years examined. Commuters in Dallas/Fort Worth were the second biggest losers with an estimated six year shortfall of about $1.1 billion, followed by Phoenix at an estimated $904 million, Atlanta at $787 million, and Detroit/Ann Arbor with an estimated $639 million disparity between gas taxes paid and federal highway trust fund money spent in the metro area.”

The non-partisan Tax Foundation, a taxpayer education organization, argues the federal interstate highway system, begun in the 1950s, should now be considered a “completed, federally-designed project.” Their position includes the following:

“There is little reason for a county road in Nebraska to be funded by taxpayers across the entire country as it is of no concern to the 99.999 percent of the nation who will never drive on the road. Bridges from one state to the next may need some federal government involvement, as well as general planning of new interstate routes and U.S. highways, but how many more new interstates will there be? Even with bridges that connect two states, the states involved can likely come to a financial agreement with one another that would merely be enforced by the federal government.

“Some argue that such a policy would leave some states with too few roads due to sparse populations. However, taking a position that rural states should receive more funding due to size even though their roads and bridges serve far fewer people is an extreme violation of the entire benefit principle of gas taxes funding transportation. Why should a person driving in an urban location be forced to subsidize the transportation of those driving in rural locations? If the answer is that they shouldn’t, then local control should be the priority, and the role of the federal government in transportation should be minimal.”

7. Will fuel efficiency improvements of vehicles affect the gas tax revenue equation?

In all likelihood, yes. The Corporate Average Fuel Economy (CAFE) standards, as adjusted in 2010 for the years 2012-2016, mandate an increase in U.S. car and light-truck fleet fuel efficiency to 35.5 miles per gallon by 2016.

While this has the benefit of saving 1.8 billion barrels of oil over the life of the vehicles sold after 2016, it is pretty easy to see that a per-gallon system will short the leading source of highway funding.

While some argue against the CAFE standard increase on this basis, other suggest it is time to consider a different means of levying taxes to fund surface transportation. This could include funding on a per-miles-traveled, or levying of tolls in congested areas, in place of a fuel consumption model. There currently is no definitive solution to this question.