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Fuel taxes: the new third rail of public policy

gas prices
REUTERS/Lucy Nicholson
Few politicians are ready to champion higher gas prices.

Conventional wisdom these days holds that the fuel taxes undergirding our roads and bridges cannot be raised without nasty political repercussions. Such hikes would directly hit everyone who drives, including folks at the bottom of the income ladder, and everyone else indirectly in likely higher prices for goods transported by truck.

Conrad deFiebre
Conrad deFiebre

This has become the new third rail of American public policy, and those shying away include President Barack Obama and Gov. Mark Dayton. Both want tax increases to be targeted solely at the wealthy, and it's tough to achieve that with levies designed as user fees for public infrastructure that nearly everyone relies on.

Their opposition ignores some hard facts. Because of their unique per-gallon rate structure, fuel taxes constantly shrink in the face of inflation and gains in fuel economy, producing rolling tax cuts on autopilot. Every other major tax — income, sales, property — automatically tracks with inflation.

After years of slippage in fuel taxes' buying power, only 42 percent of the $202 billion spent on U.S. roads in 2010 came from fuel or vehicle taxes, according to federal statistics. Somebody's non-user taxes made up the $118 billion shortfall, a figure that dwarfs annual nationwide subsidies for transit, intercity rail, walking and bicycling combined.

Remember, too, that $118 billion worth of free rides severely distorts transportation markets, propping up our dominant mobility choice even as it loses market share to other modes. To quote Ronald Reagan, the last prominent conservative to push through a fuel tax increase (nearly 30 years ago), when something stops moving, government subsidizes it.

Movement by realists

Fiscal realists, however, are edging away from the conventional wisdom. The bipartisan Simpson-Bowles budget-balancing plan calls for raising the federal fuel tax 15 cents a gallon, just enough to cover Washington's current shortfall in transportation revenue. Even though the 18.4-cent federal levy on gasoline hasn't budged since 1993, Washington Post commentator Ezra Klein dismissed the proposal with two droll words — "Just saying" — in an op-ed illustrating, basically, that no one likes to pay higher taxes.

In Minnesota, Gov. Dayton's Transportation Finance Advisory Committee has urged increasing the state fuel tax of 28.5 cents a gallon by 40 cents over 20 years (PDF). Charles Zelle, Dayton's pick for state transportation commissioner, served on the panel and has voiced support for the increase. That attracted predictable broadsides from tax-averse state conservatives, who accused their own officials of tax banditry when the gas levy was raised for the first time in two decades nearly five years ago.

Never mind that, adjusted for inflation, Minnesota's fuel tax still falls more than 10 cents a gallon short of its buying power in 1988, even as we have more aging roads and bridges to maintain. It's also below the national average. The advisory panel's seemingly shocking proposal would only play catch-up and keep motorway revenue on an even keel going forward. A less controversial alternative could be a small immediate tax hike, followed by indexing to the rising costs of highway and bridge work.

'Less regressive than other fees'

The panel notes that fuel taxes are "less regressive than other fees" and, thanks to the Minnesota Constitution's requirement that they finance only "highway purposes," would restore fiscal health to state roads and freeways as well as county, city and township arterials. Minnesota fuel and vehicle registration taxes cannot be spent on transit or anything but roads and bridges.

Lately a few conservatives on the national scene have voiced openness to raising federal fuel taxes as an alternative to further deficit spending on transportation. Grover Norquist, of course, is already scolding them.

But maybe that third rail isn't so lethal after all. Third Rail is the name of my favorite blues band (the one my wife sings in), chosen because that's where the power is. Margaret Donahoe of the Minnesota Transportation Alliance reports that no politician in this state has ever lost an election for enacting a fuel tax hike. This goes back to the times when bipartisan majorities regularly raised the levy to meet needs.

A rigid conservative orthodoxy put an end to that decades ago. It's time for our progressive leaders to stop taking cues from the government-hating likes of Norquist and make the fiscally sane investments in building and (mostly) maintaining our infrastructure that Minnesota needs to move forward.

Conrad deFiebre is a Transportation Fellow at Minnesota 2020, a progressive, nonpartisan think tank based in St. Paul. This commentary originally appeared on its website.

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Comments (9)

Less Regressive Than Other Fees?

As Mr. deFiebre reports, the Advisory Committee noted that the gas tax is 'less regressive than other fees.' The Committee is playing rather loosely with the facts. The Minnesota Department of Revenue issues periodic reports on the incidence of state taxes which include a calculation of the progressivity or regressivity of the taxes themselves. The calculation, known as the suits index, runs from +1 (most progressive) to -1 (most regressive). (You can check out the Department's latest tax incidence report at http://www.revenue.state.mn.us/research_stats/research_reports/2011/2011....)

In its 2011 tax incidence report, the Department calculates that the gas tax has an suits index of -0.332. The index for the gas tax is pretty regressive but it is not as bad as state gambling taxes (-0.498) or cigarette taxes (-0.582). So, the Committee is correct that it is less regressive than 'other fees.' However, it is the most regressive of all taxes used to support transportation for which suits indices are calculated -- MVST (-.0075), registration fees (-0.246), local sales taxes (-0.232), and local property taxes (-0.191).

The constitutional dedication of gas tax compounds rather than helps this problem. The Minnesota constitution doesn't just dedicate the gas tax proceeds to highway purposes. It sets up an elaborate system of allocation that may have been reality-based when it was established in 1956 at the start of the interstate highway system but doesn't match well to the present transportation needs in Minnesota.

For example, let's assume that state trunk highways in the metro area require an additional investment of $10 billion over the next 20 years to meet MNDOT's safety and mobility goals. This translates into an annual need of an additional $500 million. Each penny of state gas tax annually raises about $32 million. As a result, the metro trunk highway need could be satisfied by a gas tax increase of slightly less than 16 cents per gallon. However, the constitution's allocation system sends only 58.9% of gas tax to state trunk highways and by statute that amount is roughly split 50/50 between metro and outstate. As a result, the gas tax would have to be raised by slightly more than 53 cents per gallon to make certain that metro trunk highway needs are met. The unintended consequence is that county and city state aid road systems would be showered with gas tax proceeds that would be used to do one or both of two things -- (i) build even more roads, and/or (ii) displace more progressive transportation-related taxes with more regressive gas tax proceeds.

The Committee adopted a 'business as usual' approach in its recommendations that basically kicks the funding can down a road with increasingly rough pavement. Instead, the Committee should have recommended a small gas tax increase to cover needs in the short term and the adoption of a vehicle miles traveled tax as a long term substitute. The substitution would require changes in article 14 of Minnesota's constitution to acknowledge the substitution and the changed needs of Minnesota's transportation system. More of the same simply isn't helpful in a 20-year planning horizon.

Less Regressive

Jim,

Thanks for the insight on how the system works. You've got some very good and valuable information.

A quick question for you: how do you envision a "miles traveled" tax would work instead of a gas tax? I've heard the term bantered around here and there, but haven't seen a system on how it would be implemented.

A better gas tax would allocate better

Rather than a 50/50 split it would be better to allocate based on where the gas was sold. What percentage of gasoline tax revenues are generated in the metro area versus outstate?

I realize there are economic benefits to having a good road system throughout the state but it's not 50/50.

Constitution Changes?

Why would we need a constitution change to section 14 for a VMT? Just implement the tax and have the legislature allocate it to transportation as it sees fit. The gas tax can continue to be dedicated to highway purposes. It would be better to leave the VMT out of the constitution so it doesn't get similarly dedicated, except by statute. Then it could be used to fund all sorts of modes.

Replies to Todd, Dan, and David

Todd -- There have been several pilots in the US of a vehicle miles traveled tax. The State of Oregon conducted a pilot in 2007 and is in the middle of a second pilot at the moment. You can check out the 2007 program at http://www.oregon.gov/ODOT/HWY/RUFPP/docs/RUFPP_finalreport.pdf and the 2012 program at http://www.oregon.gov/ODOT/HWY/RUFPP/Pages/rucpp.aspx. The State of Minnesota began a pilot in 2011. You can check it out at http://www.dot.state.mn.us/mileagebaseduserfee/studies.html. In fact, the University of Minnesota has looked at the technical issues and has suggested such a system could be established in the near term with off-the-shelf technologies. You can check out the UofM's report at http://www.cts.umn.edu/Publications/ResearchReports/reportdetail.html?id....

Dan -- If you look at vehicle miles traveled as a proxy for gas tax proceeds, the split between the metro and outstate is roughly 50/50 for travel just on state trunk highways. You can check some of this out in the background chapter of a 2007 report from the Legislative Auditor at http://www.auditor.leg.state.mn.us/ped/pedrep/trunkhwy.pdf. From my own analysis of information by county on state aids and taxes, I know that more than $150 million in gas tax proceeds raised each year in the metro is sent outstate for non-state trunk highway roads (county state aid, municipal state aid, and township roads). There are all kinds of hidden subsidies in the funding mechanisms that have resulted in Minnesota having the fifth largest road system in the US.

David -- As a scarred veteran of the 2006 MVST campaign, I don't suggest the need for constitutional change lightly! There are several reasons why article 14 may need to be re-opened. First, my preference would be to replace the gas tax with a VMT fee. As a political matter, I suspect that would cause a bloody fight over allocation that would quickly and inevitably rise to a constitutional level. Second, the restriction of highway purposes, although somewhat squishy, would continue to represent a distorting problem even if the gas tax remains. Third, article 14 is troublesome because by creating the right to tax automobiles and the fuel used by them the language may imply that they are the only means of funding transportation. Certainly, there is language in the portion of article 14 which establishes the right to impose registration tax and fees that says it is in lieu of all other taxes on automobiles except a wheelage tax. To clear out more than fifty years of underbrush and bring article 14 into the 21st Century, I think politics would require an amendment.

Transportation Funds

I see a lot of comments from the more conservative members of the state complaining about rail and trails and how they don't pay for themselves. So it's interesting to note that the gas tax only covers 42% of road maintenance, although I'm sure that figure doesn't include license tab fees. Still, that's a pretty massive shortfall that has to be made up from other tax sources. Or the can gets kicked down the road in the form of deferred maintenance and collapsing bridges.

Conrad is right on

Recalling the difficulty in getting a recent small gas tax increase, I don't hold out much hope for this much needed proposal. But thanks for trying, Conrad.

Anyone remember the "Override 6"?

Technically they may not have lost an election for enacting a gas tax increase (the Legislature did that) but not all of them were in office two years later primarily for their support of the increase.

Still, even though the Governor won't campaign for it, he would more than likely sign a large gas tax increase sent to him by the strong progressive majorities in both house. This exercise, while helping the State transportation system could also serve as a test for Ms. Donahoe's assertion in 2014.

Where is the source for some of the stats?

I'm curious to know what the source is for this paragraph. I'm interested in reading more into the data but can't locate the appropriate place to source it.

"After years of slippage in fuel taxes' buying power, only 42 percent of the $202 billion spent on U.S. roads in 2010 came from fuel or vehicle taxes, according to federal statistics. Somebody's non-user taxes made up the $118 billion shortfall, a figure that dwarfs annual nationwide subsidies for transit, intercity rail, walking and bicycling combined."