Future of Fuel Tax
[ Highlights ]
The major highways connecting the states and metropolitan areas that have been built over the last several decades were financed from fees paid by users. More than $120 billion annually for highway finance comes from user fees, two-thirds of which derives from the gasoline tax. Following federal legislation in 1991, which dedicated a share of federal highway trust funds to transit, federal gasoline tax revenues have also been a vital funding source for new transit facilities and equipment. In addition to the federal tax of 18.4 cents per gallon, each state enacts its own fuel tax, which averages 19.1 cents per gallon across all states. Revenues from gasoline taxes, however, have been perceived as threatened by multiple sources: shrinking petroleum reserves relative to worldwide demand, declining revenues per vehicle mile due to greater fuel economy, and political reluctance to adjust the rate to counter the eroding effects of inflation and respond to growing demand.
In addition to being a stable and growing source of revenue, the user-fee principle that underlies the fuel tax has another benefit: it limits the highway program to the amount of money users are willing to pay, thereby putting some constraint on potentially unjustified spending. The system of finance has probably contributed to the positive economic return that highway investment has enjoyed for many years. In part because of reluctance to increase tax rates, at least to counter the effects of inflation, states and local governments have increasingly turned to other sources, such as property and sales taxes, to fund highway and transit projects. Though appropriate for transit funding, such sources forgo the benefits of a user-fee system for highways.
The gasoline tax should remain a mainstay for highway and transit finance for some time (Special Report 285: The Fuel Tax and Alternatives for Transportation Funding; TRB 2006). Official forecasts indicate that proven reserves are adequate to meet demand over a 15-to 20-year period, although at a somewhat higher real price than that enjoyed in recent years. Moreover, absent sustained sharp increases in fuel prices or legislation mandating higher fuel economy, which do not appear likely, fuel tax revenues will continue to grow, albeit not sufficiently to provide funds to offset growing congestion. Although the fuel tax is likely to remain an important source of transportation funding, there are mechanisms to supplement the fuel tax that would perform more effectively. The committee recommends relying more heavily on tolls and congestion fees to supplement highway funding and providing stable, broad-based state and local taxes for transit. Although these financing mechanisms should perform better, the committee observed that political support will be needed to set tolls and congestion fees and dedicated taxes for transit at appropriate levels no less than it is needed to adjust fuel taxes on a regular basis to counter inflation and respond to growing demand.