Gas Tax Holiday Should Be Made Permanent

Every time Americans fill up at the pump, they pay an additional 18 cents per gallon for gasoline and 24 cents per gallon for Diesel, thanks to the federal gas tax, which first passed Congress in the 1930s. Given that federal and state gas taxes make up around 15% of the total price, President Biden has floated the idea of a tax holiday to combat rising prices and record inflation.

While a gas tax holiday might temporarily bring the price down at the pumps, it would only exacerbate the problem of underfunded roads and do little to improve poor highway conditions that cost America’s drivers hundreds of dollars each year. The only solution is to make the gas tax holiday permanent and impose a per-mile fee on drivers that would better fund America’s roads and ensure drivers pay for their usage, not what vehicle they drive.

Under a per-mile fee, drivers would pay for the miles they drive, not the gas they consume. The principal benefit of this funding structure is that electric vehicle drivers, who are exempt from paying the gas tax, would be forced to pay their fair share for using the nation’s roads.

While the federal government has not announced any substantive plans for a national per-mile fee, the bipartisan infrastructure bill created a voluntary pilot program to study how the new system would work. In addition, last year, 16 states considered abolishing the gas tax in favor of a per-mile fee.

In 2020, the federal government raised a staggering $36 billion through the gas tax each year, with state governments raking in approximately $48.2 billion. However, while gas taxes do provide the federal and state governments with important revenue, the amount they have been able to generate has fallen substantially for three reasons. First, modern engines are more fuel-efficient when compared to earlier models. Second, electric vehicles are far more common, and finally, the federal government has not raised the gas tax since 1993, meaning accounting for inflation, the tax has been cut in real terms by 40%.

The decline in revenues generated by the gas tax has created a financial crisis at the Highway Trust Fund (HTF), the federal agency responsible for distributing funding and maintaining roads, warning it could be insolvent by 2026. HTF’s insolvency date could have been this year had it not been for the $1 trillion infrastructure bill that provided the agency with $273 billion.

The effects of declining revenues have left America’s roads in poor condition, such that the American Society of Civil Engineers gave America’s roads a D grade and estimated it would take $786 billion to improve America’s roads.

The poor condition of America’s roads has real consequences for road users. For example, ACSE estimates the poor condition of America’s roads costs drivers $130 billion each year in vehicle maintenance costs. For each driver, that amounts to about $500 each year. Excessive annual maintenance fees would likely be reduced, providing consumers with real savings if the federal government moved away from the gas tax and onto a more sustainable model of funding the country’s highways.

A per-mile fee covering all vehicles would ultimately ensure a more equitable funding mechanism and correct the free-rider problem.

Particularly concerning is that high-income Americans have been able to escape paying the gas tax, leaving lower-income Americans to fund the nation’s roads. For example, a study from 2007 found that “Americans earning less than $10,000 annually pay an estimated 2.5 percent of their income in gas taxes whereas Americans earning an annual salary of $150,000 and above pay only about 0.2 percent of their incomes in gas taxes.” This discrepancy is caused because higher-income earners can afford exempt electric vehicles that, on average, cost $55,600. On the other hand, a traditional gasoline car only costs $37,867.

While calls for a gas tax holiday are becoming increasingly loud, the tax’s inability to adequately fund the nation’s roads combined with the fact it disproportionately harms lower-income American’s means the Biden administration must make the gas tax holiday permanent. Instead, Congress must move to the more equitable and efficient per-mile fee.

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