Blog Post

Financing the Highway Trust Fund: The Case for Higher Fuel Taxes

Jun 10, 2015 | Alan J. Krupnick, Virginia McConnell, William Raich

In this series of blog posts, RFF researchers take a look at the current state of the nation’s transportation infrastructure and evaluate various policies for financing the Highway Trust Fund. See the first and second posts in the series.

From our first two blogs we saw that expenditures on roads and bridges from the Federal Highway Trust Fund (HTF) have increased over time, and the need for greater expenditures is expected to continue. Revenues into the Fund have not kept pace and will fall further behind unless Congress acts. In this blog, we discuss the advantages of a commonly discussed solution: raising the gasoline tax.

Since its inception in 1956, the HTF has been funded primarily through a federal tax on gasoline and diesel fuels. The revenue earned through the tax depends on two factors: the tax rate and the number of gallons sold. The taxes on gasoline and diesel have remained at 18.3 and 24.4 cents per gallon, respectively, since 1993. In real terms, an equivalent gasoline tax today would be 64% higher, or 30 cents per gallon.

As for the amount of fuel sold, Figure 1 shows national gasoline and diesel sales from 1983 to 2014. Since 2007, sales have fallen due to negative VMT growth from high fuel prices and the recession, and the fuel economy of new vehicles started to improve with tightening CAFE standards beginning in 2005. Going forward, a new round of CAFE standards require fuel economy of light duty vehicles to improve by close to 50% by 2025.

Diesel fuels sales, representing 38% of fuel revenues to the HTF, also fell beginning in 2007. While these sales have not dropped as drastically as gasoline, new fuel efficiency regulations on heavy-duty trucks will likely cut diesel tax revenues further in the coming years.

The government policies of raising fuel economy and funding the HTF through fuel taxes work against one another. Raising money for the HTF with a constant fuel tax requires constant or rising fuel sales over time, yet CAFE standards aim to reduce fuel consumption to promote energy security and protect the environment. As it stands now, these policies cannot both succeed.

Figure 1. US Daily Gasoline and Diesel Refiner Sales Volumes

So, should the gasoline and diesel fuel taxes be raised? Higher gasoline prices could make both more effective. More revenue would come into the HTF, and higher gasoline prices would make vehicles with higher fuel economy more appealing to consumers, thereby lowering the cost to auto manufacturers of meeting the CAFE standards.

And, there are other reasons why fuel taxes should be higher than they currently are. Automobile use leads to adverse effects on others, referred to by economists as “externalities.” These externalities include climate effects from greenhouse gas (GHG) emissions, local air pollution, congestion, road damage, and traffic accidents. If drivers are not forced to account for these externalities as part of the price of driving, they will not make efficient decisions about how much to drive, and when and where to drive.

Recent estimates of the appropriate tax on gasoline—accounting for these externalities and assuming no other policy is in effect—are around $1.20 per gallon (Parry and Small, 2012). This is well above the current tax rate on gasoline, about $.40 per gallon including federal and average state taxes. This high rate, however, may not be necessary. CBO has suggested that raising federal fuel taxes by ten to fifteen cents per gallon will address the revenue shortfall, as long as it is indexed for inflation.

With recent drops in oil prices, this may be a good time to raise the gasoline tax. A ten cent increase to the current 18.4 cent gasoline tax may raise less public outcry with gas prices around $2.75 a gallon rather than $4 per gallon. And, with the price at the pump jumping up and down between $2 and $4 per gallon over the past decade, ten cents would hardly be visible.

Nevertheless, public and political support remains a big hurdle to increase federal fuel taxes. A recent RFF-Stanford-NYT poll shows that only one third of the US public would support raising the gasoline tax to address associated carbon emissions. However, a California poll from the Mineta Transportation Institute finds significantly higher support for the tax when justified by transportation improvements.

There may also be other, more efficient ways of generating revenues. While a fuel tax does well to address GHG emissions, which depend entirely on gallons of fuel used, the other externalities described above—local air pollution, road damage, congestion, and accidents—are much more dependent on the number of miles driven and the time and location of those miles. We will explore policies based on miles traveled in our next blog post.

How about continuing to raid the federal treasury? Ignoring calls to increase the federal fuel tax, Congress has instead approved roughly $65 billion in transfers from the General Fund over the last decade. These transfers will need to increase if expenditure and revenue trends continue. As stated in the first blog post of this series, CBO (2015) projects that the cumulative difference between expenditures and revenues to the HTF will reach $168 billion by 2025. Continuing the pattern of General Fund transfers, however, is problematic.

General Fund transfers have no ability to address any driving-related externality. Raised primarily through income and payroll taxes, the General Fund of the Treasury has no significant revenue source that induces drivers to use existing transportation infrastructure in a more efficient manner. Further, transferred money must be taken from other federal programs unless other taxes, such as the income tax, are raised.

Overall, the combined effects of inflation, uncertain fuel prices and VMT growth, and tightening fuel economy regulations make it clear that HTF revenues cannot be maintained with a flat tax rate on transportation fuels. And, short-term general revenue patches have done nothing to promote more efficient long-term decision-making for the state and federal highway system. We have made the case here that at least part of the solution could be higher fuel taxes. Other policies to increase the efficiency of the federal highway system may be better or even complementary, and will be the subject of the next posting.