How Raising the Gas Tax Could Jumpstart the Economy
Business + Economy

How Raising the Gas Tax Could Jumpstart the Economy

Getty Images/The Fiscal Times

As President Obama renews his focus on fixing the economy and the new deficit “super committee”  gears up for action next month – it must cut the deficit by at least $1.2 trillion over the next 10 years-  deep cuts in government spending could thwart U.S. economic growth just when it desperately needs a boost. A prime example is the one-third cut in federal aid for the nation’s highways proposed by Rep. John L. Mica, chairman of the House Transportation and Infrastructure Committee.

Mica argues that that’s the “fiscally responsible” thing to do because the 18.4-cent federal tax on a gallon of gasoline isn’t bringing in enough money to fund the previous $51.5 billion annual outlay and keep the Highway Trust Fund solvent.

He’s right about the arithmetic, of course. The tax, which hasn’t been raised since 1993, is generating less revenue as cars and light trucks get steadily better mileage. In recent years, the trust fund has had to be supplemented with money from general revenues to keep highway construction spending levels up, as inflation has cut the original value to only 12 cents a gallon.

The big increases in fuel efficiency standards announced recently by the Obama administration for automobiles — and on Wednesday for trucks — will only make matters worse in terms of funding for highway maintenance and construction. 

The sensible response would be to raise the tax, which even Mica correctly regards as a user fee rather than a tax. But he and all but one of his 32 Republican colleagues on the committee have signed the Americans for Tax Reform pledge to oppose any and all tax increases — even something that is clearly a user fee.

More money is desperately needed for highway construction and maintenance to reduce the economic losses due to the country’s inadequate infrastructure. A new report by the American Society of Civil Engineers said that glaring deficiencies in America’s surface transportation systems drained households and businesses of nearly $130 billion last year, including about $97 billion of increased costs to operate and repair vehicles and $32 billion of increased travel time because of congestion and delays. Within a decade, the economic costs to the country of a deteriorating infrastructure will increase by 82 percent, to $210 billion annually, the report states.

Rep. Nick J. Rahall of West Virginia, the ranking Democrat on the House Transportation committee, said in a statement, “The report paints a disturbing picture of how America’s small business and middle class family incomes will be affected by our nation’s deteriorating surface transportation systems.” Cutting spending by a third, as Mica proposes, would make the economic impact “even worse than the grim predictions by the economists in the report,” Rahall said.

Rahall, however, did not suggest funding the needed extra spending by increasing the gasoline tax. Politically that’s a non-starter, but it shouldn’t be in a world of austerity. It would be a fair user fee because it is paid by motorists, and the more one uses the highways, the more one pays.

Actually the tax was instituted in 1932 by President Herbert Hoover not to pay for highways, which were seen as the province of states rather than the federal government, but to reduce a budget deficit caused by the Depression. Every president since then, except for Republican Gerald Ford, then raised it until it hit 18.4 cents in 1993. The biggest increases, a nickel each, came under Republicans Ronald Reagan and George H. W. Bush. President Dwight D. Eisenhower raised it to finance the interstate highway system in the mid 1950s.

Today the federal gasoline tax is a tiny portion – just 5 percent – of the average $3.67 price paid by motorists this month for a gallon of regular.  State excise taxes vary widely and average 20.8 cents, according to the American Petroleum Institute.

Higher gasoline taxes undoubtedly would be a burden for households and businesses. On the other hand, there are environmental and social benefits as well, according to economists such as N. Gregory Mankiw of Harvard University, formerly chairman of President George W. Bush’s Council of Economic Advisers.

In a Wall Street Journal column back in 2006, Mankiw argued that the tax should be raised 10 cents a gallon each year for a decade. Increasing the cost of gasoline would reduce driving, which would reduce emissions and highway congestion, trim budget deficits, reduce world oil prices, enhance economic growth and improve national security.

Asked recently whether raising the tax to finance more highway construction and better maintenance  would also be positive, Mankiw declined to take a position, saying he hadn’t done a cost-benefit analysis of that.

A key reason for the political opposition to raising the gasoline tax both at the federal and state levels is that motorists buy fuel frequently and are highly aware of the prices they pay at the pump. But in 2008 and again this year, a surge in world oil costs sent those prices soaring. Even with some recent declines, the average cost of regular gasoline was 89 cents a gallon higher than it was a year earlier. Beside such swings, Mankiw’s idea of a 10-cent-a-year increase looks like small potatoes.

And 10 cents a gallon more would not only mean the highway trust fund could continue to provide more than $50 billion a year in aid to the states, but that aid could be increased. If continuation of the current 18.4 cent tax — and the 24.4 cent tax on diesel fuel — provides $35 billion a year, another dime would generate about $54 billion. A second dime would jump that to $73 billion.

Before long, there would be enough money to make the sort of investments in the infrastructure the economy requires and to help put the federal budget on a sustainable path. If Mankiw and other economists are right, a significant share of the money involved would come out of the oil producing nations’ pockets, not those of American motorists.

And if that seems too good to be true, keep in mind what has happened to oil prices over the past year: they went up roughly $1 a gallon. Ten cents a year for a decade would have a powerful impact on both highways and budgets and in all likelihood would be forgotten in the volatility of world oil prices.