At the most recent Republican primary debate, former governor and United Nations ambassador Nikki Haley (R-SC) proposed eliminating the federal gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline.
to lower fuel prices for consumers. Eliminating the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
might provide some short-term relief at the pump, but it would create more problems than it would solve, further constraining sound revenue options for the federal government at a time of escalating debt, which could worsen inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
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The federal gas tax has been set at 18.4 cents per gallon of gas and 24.4 cents per gallon of diesel since 1993. Federal gas tax revenues flow into the Highway Trust Fund, which the federal government then distributes to the states to fund transportation projects. But thanks to inflation, federal gas tax revenues have declined in real terms by more than 50 percent since 1993. Because of that decline, gas tax revenue has not been sufficient to cover federal highway spending, necessitating transfers from the general fund to keep the Highway Trust Fund solvent. Since more than 60 percent of federal revenue comes from income taxes and another 30 percent from payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.
es, this means we are moving more towards a policy of subsidizing road use while punishing work, saving, and investment.
The shift is unfortunate, as the gas tax is an economically efficient way to fund highway infrastructure. The gas tax roughly follows the user pays principle: people who purchase more gasoline also benefit more from highway infrastructure.
The gas tax, however, is not a perfect user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided.
A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them.
. For example, drivers of electric vehicles (EVs) avoid the gas tax, yet use highways freely and in fact impose larger maintenance costs on roads due to the relatively heavy weight of EVs. However, EVs currently make up less than 1 percent of the total U.S. vehicle fleet, so it isn’t a major issue yet, but will likely become more of a problem as the EV share grows over time.
In the future, the gas tax could be replaced by a tax on vehicle miles traveled, or a VMT tax. A VMT tax, based on both the amount of miles traveled and the vehicle’s weight per axle, would more directly approximate the cost vehicles impose on highway infrastructure.
The Haley proposal, however, is not to replace the gas tax with a more effective user fee; it is to eliminate the tax altogether. Repealing the gas tax and not replacing it with some other form of user fee would mean relying even more on general federal revenue, and thus relatively destructive taxes, to fund infrastructure. With massive deficits expected over the next decade, eliminating the gas tax would risk putting even more pressure on income taxes to close the gap, to the detriment of the economy.
The federal gas tax is small in the context of total taxes imposed at the pump, as every state except Missouri, Alaska, and Mississippi imposes a tax higher than the federal one (and Mississippi taxes gas at the same rate as the federal one). But, even though the federal gas tax is lower than most state-level gas taxes and much lower than gas taxes in most developed countries, it is the largest consumption-based tax the federal government applies. Repealing the gas tax would shift the composition of U.S. tax revenue further away from consumption, in favor of more distortionary taxes like income.
Interestingly, Haley moved in the opposite direction as governor of South Carolina. In 2015, she proposed a tax swap that involved increasing the state gas tax by 10 cents a gallon and reducing the top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
rate from 7 percent to 5 percent. Such a proposal at the federal level would be commendable.
Haley has also advocated making personal income tax cuts from the Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth.
permanent, reforms that are generally pro-growth but on their own would substantially worsen deficits. Raising the gas tax and indexing it to inflation could be part of a fiscally responsible plan to pay for these tax cuts. Without that option, the budget math becomes considerably more difficult.
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