At least this time the politicians are being honest. There’s a lot of discussion about raising the gasoline tax this year for one simple reason: the politicians feel they won’t be punished for the increase due to the huge drop in gas prices over the past few months.
We are told that an increase is necessary to help repair our crumbling highway infrastructure. But raising the gasoline tax may not provide the steady income stream that would support this project.
Let’s start with some basic facts. The federal gasoline tax is 18.4 cents per gallon and has remained unchanged since 1993. Minnesota adds another 28.5 cents, for a total of 46.9 cents a gallon. These figures do not change regardless of the price of gas. However, in percentage terms, the tax increases as the price drops.
For example, at $3.85 a gallon you are paying less than 14 percent in tax. But at $1.85 a gallon you are paying 34 percent in tax.
Listening to the discussion, one would assume that revenues from the gasoline excise tax have dropped over the past 20 years, due to the increasing efficiency of today’s vehicles. However, according to data from the Tax Policy Center, total revenues from these taxes have increased significantly during this time. Minnesota’s tax collections have increased by more than 50 percent since 1997. The reason is simple: the total miles driven in the United States exploded until they leveled off during the Great Recession.
One might argue from this data that we don’t have a revenue problem so much as an expense problem. Yet there is little doubt that roads and particularly bridges are aging rapidly and that they have been neglected for a long time.
This may well be a metaphor for our other major problems like Social Security and Medicare and our pattern of neglecting solutions until the costs of solving problems become onerous.
The gasoline tax is considered in tax parlance a “sin tax.” Much like taxes on tobacco and alcohol, one of the gas tax’s main purposes is to change behavior. The tax purposely increases the price on the product to the point that people will use it less. However, unlike tobacco and alcohol, the gas tax revenues are dedicated to an essential function.
Sin taxes by their nature present a paradox. If an aim of the tax is to decrease the use of the product, then revenues obviously decrease, too. If everyone stopped smoking, more than $30 billion in tax revenue would disappear. Governments become dependent on revenue from these sin taxes.
When we look at the gas tax, we can readily envision a decrease in revenues. Automobiles are continuously becoming more fuel-efficient, and this trend will only accelerate as older cars are replaced and new mileage standards are phased in. When gas prices go back up (and does anyone doubt they will?), alternative fuels will become more economical. And we can certainly expect that electric cars will continue to evolve and become more viable from both an economic and an infrastructure viewpoint.
All this tells us is that before raising taxes on gas, everyone should be clear on the reason why. If it is to decrease demand for gas for environmental purposes, then the tax should be raised significantly. Note that Gov. Mark Dayton has proposed imposing a 6.5 percent tax at the wholesale level, which would automatically increase the tax as prices increase. That tax rate would increase the per-gallon tax about 12 cents, but this would double if the wholesale price of gas doubled. Such a huge increase might indicate that the rationale is ultimately to depress demand.
Yet the rationale given by the governor is to increase revenues for road and bridge repair. And while that might happen in the short term — when prices are low — the longer-term outlook is that the revenue stream would not be sufficient. Indeed, if the tax per gallon kept rising with prices — as it would with the wholesale-level tax — theoretically, then, total revenues could decrease.
If a boost in revenues from the gas tax is the primary goal, then tax increases should be more modest, and policies should be enacted to keep the retail price of gasoline low, to encourage more driving and therefore more tax revenues.
It is simply a contradiction to want both conservation on the use of gasoline and increased revenues for road and bridge repairs. The solution would be to divorce the two goals and seek a revenue stream that is not dependent on gasoline use. The most straightforward way is to make the case for additional funds and dedicate revenue out of general funds.
The point is that one cannot evaluate the efficiency or merits of a tax increase without knowing its purpose. The governor appears to be proposing a monumental increase in the gas tax that is unlikely to achieve his stated aim.
Paul Gutterman is director of the master of business taxation program at the University of Minnesota’s Carlson School of Management.