The sharp rise in gasoline prices caused by the Iran war has led to bipartisan calls, and in some cases action, to reduce US gas taxes. At least three Republican-run states have declared gas-tax holidays, and three Democratic US senators have introduced legislation to suspend the federal gas tax until October. Several European countries have reduced fuel taxes as well.
These moves, while understandable politically, reduce government revenue and actually worsen the global oil crisis by exacerbating the supply-demand imbalances. Many consumers seem to be turning to a more permanent solution, with the crisis already delivering a big boost to global electric-vehicle sales. And all of this — the temporary reductions in gasoline taxes and the permanent reductions in gasoline demand from EV sales — raises questions about what will replace what has long been the leading means of paying for transportation infrastructure in the US and much of the world.
The only plausible answer, it has been clear for a while, is user fees. These already exist in the US in the form of highway, bridge and tunnel tolls and, since early last year, New York City’s congestion charge. Expect more tolls and congestion charges in the future but also some sort of mileage fee to be charged to everyone with a car or truck and possibly monitored by Global Positioning System trackers. Fuel taxes have been a remarkably efficient way of collecting revenue and even promoting behavior friendly to the environment. Their replacements will be kludgier and more intrusive.
The US, it must be said, has not used fuel taxes to anywhere near their full potential. At the federal level, where, since 1993, the excise tax on gasoline has been stuck at 18.8 cents a gallon, and the diesel excise tax at 24.4 cents, fuel taxes and other vehicle-related fees no longer bring in nearly enough revenue to cover what Congress allocates to transportation.
Congress has been covering the gap with appropriations from general revenue, but given the yawning federal deficits, that doesn’t seem sustainable.
The spending increases in recent years have been huge, partly because of COVID-19 stimulus efforts and partly because of inflation, and reining them in is certainly one option. In crowded places, transit spending clearly complements road spending by easing traffic congestion, but that’s less true elsewhere.
Another possibility would be raising gas taxes. State and local governments have been doing this in the absence of federal action, but the increases haven’t been enough to fully counteract the decline in federal revenue. Adjusted for inflation, overall US gas tax revenue is lower than it was 30 years ago.
US gasoline taxes at all levels remain quite low by international standards.
So, yes, gas taxes in the US could stand to be higher. But raising them would speed the underlying trend that is undercutting motor-fuel tax revenue around the world. Even in the EV laggard that is the US, gasoline consumption is lower than it was 20 years ago and falling.
Fuel-efficiency improvements in internal-combustion-engine vehicles are a chief reason for this development. (A slowing in the growth of vehicle miles traveled is another.) This move and the general anti-EV stance of the Trump administration and the Republican Congress feel more like lost-cause signaling than sustainable policy, though. As EVs keep improving, they will eventually become so superior to the fossil-fueled competition that it’s hard to see how their rise can be stopped — and it shouldn’t be, of course.
Which brings us back to replacing gas taxes. All but 10 US states have implemented EV-specific annual registration fees ranging from $260 in New Jersey to $50 in Hawaii and South Dakota. Several are offering mileage-based fees as an alternative, and Hawaii is planning to make these mandatory for EVs in 2028 and all vehicles in 2033.
This will be accomplished with annual odometer readings, which can work in a state surrounded by thousands of miles of ocean. Elsewhere, GPS-based systems seem necessary to align fees with states’ actual road use. Adjusting fees by vehicle weight also seems crucial because a large SUV wears down roads faster than a subcompact. And at some point the federal government needs to be integrated into the fee-collecting system if a Highway Trust Fund and significant federal transportation spending are going to continue.
It’s all a reminder of what an elegant solution motor-fuel taxes have been to the problem of how to fund transportation. They’re easy to administer, don’t involve tracking motorists’ movements and do quite a decent job of matching tax payments to road wear-and-tear (because heavier vehicles usually get fewer miles to the gallon).
The one innovation in user fees that offers clear advantages over gas taxes is congestion pricing because it incentivizes drivers to use roads more efficiently. The Trump administration — which has been trying, so far unsuccessfully, to halt New York City’s congestion pricing experiment — recently announced a Freedom to Drive initiative to address “the nation’s growing congestion problem.” I know just the policy to fix that.
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Justin Fox
Justin Fox is a Bloomberg Opinion columnist covering business, economics and other topics involving charts. The views expressed here are the writer's own. — Ed.
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