Business Ethos Blog

Gas Taxes: Where Does the Money Go?

Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan


Dr. David MielkeGas prices appear headed below a nationwide average of $2 a gallon in coming days, one of the swiftest declines on record.  Average pump prices—$2.04 a gallon last Thursday—are now down more than 40% since last June, when they stood near $3.68 a gallon, according to the auto club AAA. Gas prices are below $2 a gallon in 27 states, including Michigan.  Is this the perfect time to raise the Federal gas tax?  Is there a concern that prices are too low, causing consumers to buy bigger vehicles with lower gas mileage per gallon?  Will this hurt sales of hybrid and electric vehicles?  Will higher Federal gas taxes help to correct this problem?  What is the “Right Thing to do?”  Let’s look at some issues:

1. Some of our legislators in Congress are talking about raising the Federal gas tax for the first time in 2 decades.  Congress could then invest the windfall in roads, bridges and other projects.  The logic is that with low gas prices, the public won’t notice an extra dime in taxes.

2. The current temporary highway funding bill expires in May–the same time as our state election and vote on raising the state sales tax to fund roads.   Congress in December passed temporary funding because the Federal Highway Fund was expected to be depleted early this year.

3. The current Federal gas tax is 18.4 cents a gallon and 24.4 cents a gallon on diesel fuel.  The taxes fund the Highway Trust Fund (HTF) which was first established in 1956 with a 3 cent tax to build the interstate highway system and its expansion and upgrades over the decades.  The tax was increased in 1982, 1990 and 1993.

4. The problem is that since 2008 the Federal HTF sending has far outpaced dedicated gas tax revenues and Congress has made up the difference with $54 billion in cash transfers from the general revenues.  To cover future obligations and close the deficits, fuel taxes have to be raised 10 to 15 cents a gallon according to the Congressional Budget Office.

5. Vehicle miles are plateauing and cars are more efficient, eroding the projected growth in the tax base.  Electric vehicle purchases are heavily subsidized and pay no gas taxes.

6. Since the 1990s, the Highway Trust Fund has come to fund much more than new roads and bridges and highway maintenance, abandoning the usual user pays behind the gas tax.  Drivers now see about a quarter of their gas taxes diverted to subsidize mass transit in merely six metro areas and other projects for street cars, ferries, sidewalks, bike lanes, hiking trails, urban planning and even landscaping nationwide.  None of these other projects contribute anything to the HTF.

7. Michigan has the same issue—only about 90% of the current gas taxes are used for roads, the balance is used to subsidize mass transit and other side projects.

8. Federal spending on such side projects has increased 38% since 2008, while highway spending is flat.

9. Simply using the taxes that are supposed to pay for highways to actually pay for highways, makes the HTF 98% solvent for the next decade without raising the taxes.

10. Some say it is a myth that that US roads and bridges are crumbling.  Federal Highway Administration show that the condition, quality and safety of US surface transportation are steadily improving.

11. There is also concern that according to a 2013 study the  allocation of the gas tax tended to redistribute money from poorer states to wealthier states and to regions with lower transportation needs than other parts of the country.  Seven states and Washington DC received over twice as much as they paid.

12. Some advocate that since nearly three-quarters of highway spending is already supplied by state and local government, and if the federal role is reduced, they can decide either to increase their own gas taxes, fund their roads some other way, such as toll roads.  The states may also build cheaper since the Davis Bacon prevailing wage and Buy America higher costs might not apply.

Is the real crisis how the gas tax money is spent not the amount of the money to spend?  Should Congress eliminate the Federal gas tax and instead have the states deal with road maintenance and repair?  Maybe Congress should pass a bill for a national referendum in May to have the public vote for or against raising the Federal gas tax—it could coincide with the state referendum on raising the sales tax for roads in Michigan.  What is the “Right Thing to do?”  It is time to revamp the Highway Trust Fund by eliminating the extra projects now funded with the gas tax.  With those changes, there is no reason to raise the tax.