Increase Excise Taxes on Motor Fuels by 25 Cents

Revenues from federal excise taxes on motor fuels are credited to the Highway Trust Fund to pay for highway construction and maintenance as well as for investment in mass transit. Those taxes currently are set at 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel produced. (State and local excise taxes bring total average tax rates nationwide to about 48 cents per gallon of gasoline and 54 cents per gallon of diesel fuel.)

This option would increase federal excise taxes on gasoline and diesel fuel by 25 cents per gallon, to 43.4 cents per gallon of gasoline and 49.4 cents per gallon of diesel fuel. That change would increase federal revenues by $140 billion from 2012 through 2016 and by a total of $291 billion over 10 years. (Because excise taxes reduce the tax base for income and payroll taxes, higher excise taxes would lead to reductions in revenues from those sources. The estimates shown here reflect those reductions.)

A rationale for increasing excise taxes on motor fuels is that the rates currently in effect are not sufficient to fully fund the federal government's spending on highways. In addition, economic efficiency is promoted when users of highway infrastructure are charged according to the marginal (or incremental) costs of their use, including the "external costs" that are imposed on society. Because the current fuel taxes do not cover all of those marginal costs, higher fuel taxes could more accurately reflect the external costs created by the consumption of motor fuel. Some of those costs--including the costs of pollution, climate change, and dependence on foreign oil--are directly associated with the amount of motor fuel consumed. But the larger fraction of those costs is related to the number of miles that vehicles travel, usage that results in road congestion, noise, pavement damage, and accidents.

If the cost of fuel was higher, people would drive less or purchase vehicles that used fuel more efficiently, thus reducing some of the external costs. (In contrast, paying for highways and mass transit through general revenues provides no incentive for the efficient use of those systems.) Various studies suggest that, in the absence of a tax on motor fuels or the number of vehicle miles traveled, the external costs of motor fuels amount to at least $1 per gallon, indicating that for drivers to cover the costs they impose on society, excise tax rates on motor fuels would have to be substantially higher than the current rates. Under this option, tax rates on motor fuels would more closely reflect those external costs. In addition, this option would have relatively low collection costs.

An argument against this option is that it could be more economically efficient to base a tax on the number of miles that vehicles travel. (Such a usage fee could be assessed on its own or in conjunction with taxes on motor fuels.) For example, imposing tolls or implementing congestion pricing (charging fees for driving at specific times in given areas) could be better ways to alleviate congestion. Similarly, a levy on the number of miles driven could be structured to correspond more closely to the costs of repairing damaged pavement than could a tax on motor fuels. However, creating the systems necessary to administer a tax on the number of vehicle miles traveled would be more complex than increasing the existing excise taxes on fuels.

Other arguments against raising taxes on motor fuels involve issues of fairness. Such taxes impose a proportionately larger burden, as a share of income, on middle- and lower-income households (particularly those not well-served by public transit) than they do on upper- income households. Similarly, those taxes impose a disproportionate burden on rural households because the benefits of reducing vehicle emissions and congestion higher prices for transported retail goods, for instance-- are greatest in densely populated, mostly urban, areas. those higher prices would further increase the relative Finally, to the extent that the trucking industry passed the burden on low-income and rural households. higher cost of fuel on to consumers--in the form of