(Note: This entry was originally published on October 7, 2015.)
It’s that time again!
Congress has waited until the last minute to solve all sorts of avoidable problems – funding the government as mandated by the Constitution, raising the debt ceiling as totally not mandated by the Constitution, and figuring out how to pay for roads and bridges.
Roads and bridges don’t get a lot of love in the press – they’re just not sexy or exciting. But you may have heard recently about the Highway Trust Fund running out of money. Turns out, the federal government collects a special excise tax every time you buy a gallon of gasoline – 18.4 cents to be precise – that helps to pay for new roads and bridges and to repair old roads and bridges. It sounds rather mundane – after all, building and maintaining roads and bridges is one of the most basic functions of governments at all levels – city, state, or federal. Unfortunately, the federal government isn’t collecting enough money through that excise tax to pay for all of the building and repairs that are necessary in a geographically expansive country with a half-century-old infrastructure.
In recent years, Congress has simply transferred funds from its general fund (paid for by our individual and corporate income taxes), and this has plugged the gap. But as any casual observer of Congress will see, funding anything these days is proving to be quite difficult for some of our Representatives and Senators. But why is it turning out to be so hard to keep dollars flowing for something as basic as roads and bridges?
We can actually summarize the problem in a single chart.
What’s going on here? We’ve got four series of data, each of which has been indexed, meaning that the value in each year shows us how much larger or smaller it is relative to some base year. In this case, the base year is 1993. Why? Because that’s the last time the per-gallon tax on gasoline was adjusted. Got it? Great! Let’s dive in, one by one.
I Got the Purchasing Power Blues (gas tax, adjusted for inflation)
The federal gasoline tax has remained unchanged since 1993, which wouldn’t seem like sad a bad thing for taxpayers, because hey! the federal tax we pay on gasoline hasn’t gone up in over 20 years, and that’s a good thing, right? From the perspective of the person paying the tax, absolutely. But from the perspective of the government collecting the tax? Not so great. Because just as the per-gallon tax has remained constant, the prices of, well, just about everything have gone up, which means that the measly 18.4 cents per gallon the federal government collects just doesn’t go nearly as far as it used to. Ask any of my economic principles students, and they can tell you – when prices rise, our dollars lose purchasing power, a loss from which not even the United States government is immune.
If You Build It, They Will Drive On It (vehicle miles traveled, VMT)
People are driving more miles. No surprises there. Ever since the interstate highway system was created way back during the Eisenhower administration, Americans have taken to the roadways in increasing numbers, thanks to a growing population and a greater demand for cross-country travel. In addition, consider all of the products and supplies that are trucked back and forth in giant 18-wheelers each year. All of this driving adds up to more wear-and-tear on existing highways and byways, which leads to more and more money spent on maintaining the roads we already have. You break it, you buy it, And in this case, the “you” is “all of us”, with Uncle Sam and his city/state cousins picking up the tab. While VMT dropped a bit during the most recent recession, and hasn’t yet returned to its most recent peak (in part due to people finding alternative modes of transportation), we’re still driving a lot more than we were back in 1993.
Engines Roar, So Let’s Build MOAR ROADS (system mileage)
Wear-and-tear on existing roads is bad enough, but on top of that, the federal government continues to build new highways, wider highways, bigger more badass highways. This means a huge upfront cost in terms of obtaining right-of-way, clearing land, and actually pouring the cement/asphalt/concrete. And once it’s built, you guessed it…just like a brand new car fresh off the lot, the roads being to depreciate and deteriorate, piling up more maintenance costs on down the road (get it? down the ‘road’?)
GIMME FUEL, GIMME FIRE, GIMME THE FUEL ECONOMY I DESIRE (average fuel economy)
Over the last decade, the average number of gallons of gasoline it takes to get from Point A to Point B has decreased substantially. Some of this increase in fuel economy has occurred ‘naturally’, as consumer seek out cars that get better mileage, and car markers respond by designing more fuel-efficient vehicles. On top of this market push, the federal government has continued to push for higher fuel economy standards, in an effort to decrease dependence on fossil fuels for reasons concerning both the environment and economic security. As vehicles become more fuel efficient, drivers need to purchase fewer gallons in order to travel the same distance, which translates into fewer 18.4 cent payments to the federal government.
– demand for (use of) roads is increasing (VMT is up by over 30%);
– more roads are being built (up 5%), and an aging system will continue to require maintenance;
– per-mile-demand for gasoline is decreasing (in part due to the 25% increase in average fuel economy); and,
– the federal tax on fuel remains unchanged in nominal terms (which means 40% loss of purchasing power).
Even if the tax on gasoline had been tied to the price level when it was last adjusted in 1993, meaning that it was being adjusted for inflation on an annual basis to compensate for a loss of purchasing power, the revenue generated from the tax would still today be insufficient to account for higher levels of required spending needed just to maintain our current system.
So…What to Do?
A number of options are available to Congress, the real question being whether they possess the willingness to do anything other than kick the can further down the metaphorical road.
1) We could hike the fuel tax in one fell swoop, and then chain it to the price level in the future. This would catch us up with 20 years of price fluctuations, and ensure that the fuel tax maintains its purchasing power moving forward. But, just to break-even with the higher price level, the per-gallon tax would need to rise from $0.184/gallon to $0.301/gallon, adding about $0.12 to the current price of every gallon of gasoline. This might sound drastic, but in a world where gas prices swing back and forth by $0.10, $0.20, or $0.30 within a single week or month, this might not be such a bad jolt to the system. Demand for gasoline is relatively inelastic, so there would not likely be a huge dip in gallons of gasoline purchased. After this one-time spike, the tax would rise by an average of 2% in future years, which in dollar terms would mean about an additional $0.01/gallon per year. Not such a bad idea…except for the increase in VMT, the increase in fuel economy, and the increase in system mileage.
2) We could simply scrap the fuel tax and roll highway construction and maintenance back into the general fund. Dedicated revenue/expense budget items can be nice, until the revenue starts drying up and/or the expenses balloon. On top of that, Congress can’t seem to agree to fund anything, and adding highways back into the general fund budget absent any other changes on the revenue side of the equation would automatically increase the annual deficit (SACRILEGE! TREASON!). However, we’re already paying for the highway funding deficit with transfers to the highway trust fund from the general fund. So perhaps the only real challenge would be finding the money form elsewhere if the fuel tax goes away. (I know! I I know! Is funny joke, no?)
3) We could switch from an excise tax on fuel to a vehicle-miles-traveled tax. It makes sense in that construction/maintenance of each mile of road would be funded by a road-user fee. This would account for the fact that more miles are being driven, even as fewer gallons of gasoline are purchased per mile traveled. In more technical terms, rather than taxing a complement to road miles (gasoline), we tax the use of the road itself. This option makes a lot of sense, but it is not without its own challenges: how would we measure VMT, and how would we go about assessing the tax? (I suspect Grover Norquist and Co. would have something to say about this….)
I don’t imagine we’ll be seeing any significant changes in the next few weeks, as Congress will be having bigger arguments over the federal budget in general, and the debt ceiling in particular. It would be nice if we could find a more sustainable method of funding our interstate highway system. It really is an amazing bit of public infrastructure, and it would be a shame to see it crumble. Roads and bridges may not be sexy, they may not get the attention they always deserve, but as citizens and taxpayers, it would behoove us all to pay a little more attention to some of the mundanities of taxing and spending, and encourage Congress to find a more permanent solution to a long-term challenge.
Don’t hold your breath.