Blog Post

The Limits of a Gasoline Tax

Jan 25, 2013 | Margaret A. Walls

In a recent New York Times Sunday magazine “It’s Your Money” column, journalist Adam Davidson bemoaned his gridlocked commute from New York City to New Jersey, writing that he would have “happily paid whatever it cost to persuade some other drivers that it wasn't worth it for them to be on the road.” Mr. Davidson referenced work by our former RFF colleague Ian Parry (now at the International Monetary Fund), who in a 2007 paper in the Journal of Economic Literature, coauthored by Winston Harrington and myself, concluded that the various externalities associated with gasoline consumption warranted a $1.25 per gallon gasoline tax. Forty percent of this tax, we estimated, was attributable to congestion.

There’s no doubt that congestion externalities are substantial. Individual drivers fail to account for the marginal external cost they impose on other drivers during peak travel periods in busy urban areas leading to excessive amounts of congestion. These delay costs and extra fuel consumption from sitting in traffic add up to a significant sum – more than $100 billion in 2011, according to the Texas Transportation Institute’s annual estimate. But I think we were wrong to attach these congestion costs to gallons of gasoline consumption. The appropriate Pigovian tax for internalizing congestion costs is not a per gallon gasoline tax but rather a fee per mile that varies with the degree of congestion. On congested highways in urban areas during peak commuting periods, the fee might be substantial but on rural roads and in urban areas during off-peak travel periods, the fee should be zero. A gasoline tax is a blunt instrument for addressing congestion. Worse, it probably would do nothing to solve the serious problems that exist in many cities.

This imperfection in the gas tax for addressing congestion problems will worsen in the future. For one thing, the share of the vehicle stock comprised of hybrids, electric vehicles, and other alternative fuel vehicles is steadily rising. The Energy Information Administration forecasts that 12 percent of all cars and light-duty trucks on the road in 2025 will be alternative-fuel vehicles, up from only 5 percent in 2010. This increase is partially spurred by the new fuel economy standards adopted this past year, which require new cars to achieve a minimum of approximately 40 miles per gallon by 2017, ratcheting up to 55 miles per gallon by 2025. Light-duty trucks face similar increases. These new standards will force all cars and light trucks to be more fuel efficient, making the per gallon gasoline tax even less effective.

They certainly will make the tax a less effective means of raising much-needed revenues for our nation’s roads. Virginia’s Governor, Bob McDonnell, recognized this in his recent proposal to drastically alter the way the state raises funds for transportation. Governor McDonnell proposed eliminating the state’s 17.5 cents per gallon gas tax and replacing it with a combination of a general sales tax increase (from 5 percent to 5.8 percent), an increase in motor vehicle registration fees (by an average of $15 per year), including a surcharge on alternative fuel vehicles, and a plan to capture more revenue from Internet sales. The Governor also proposed to increase the portion of sales tax revenues that goes to roads. A litany of folks are lined up against the proposal – Democrats in the legislature who insist on more of a “benefit principle” or “user pays” approach and would prefer to see an increase in the gas tax and anti-tax Republicans who oppose any tax increase – but if it passes, Virginia would be the first state to do away with its gas tax and move to a new approach to funding road infrastructure.

A full analysis of the McDonnell proposal is a discussion for another day but some facts are clear. (1) Per-gallon gas taxes can be expected to raise significantly less revenue in the coming years. (2) Increasing gas taxes is politically extremely difficult, which is why we have an 18.4 cents per gallon federal gas tax that hasn’t been raised in nearly two decades. (3) Our nation’s road infrastructure is crumbling and badly in need of a cash infusion.

A carbon tax may be the right way to go to address global warming, and this would lead to a tax on all energy sources (proportional to their carbon content), including gasoline. But for some of the other most pressing transportation problems – congestion externalities and road infrastructure funding shortfalls – perhaps it’s time to move beyond the long-standing political stalemate over increasing the gas tax to think creatively about new policy choices and funding approaches.