Increase Excise Taxes on Motor Fuels and Index for Inflation

Background

Since 1993, federal excise tax rates on traditional motor fuels have been set at 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel. The revenues from those taxes are credited to the Highway Trust Fund to pay for highway construction and maintenance as well as for investment in mass transit. (A portion of the fuel tax—0.1 cent per gallon—is credited to the Leaking Underground Storage Tank Trust Fund.) Those tax rates are not adjusted for inflation; if they were, in 2019, they would be approximately 15 cents higher.

In 2017, revenues from the federal excise taxes on gasoline and diesel totaled $35.8 billion. Those revenues were generated from the sale of 184.7 billion gallons of motor fuels—an average of about 832 gallons per registered driver. In the Congressional Budget Office's 10-year economic projections, revenues from gasoline and diesel taxes decline at a rate of about 1 percent per year. Factors contributing to that projected decline include rising vehicle fuel economy (resulting from the increasing stringency of the federal Corporate Average Fuel Economy standards) and a slow rate of growth in the total miles traveled by vehicles.

Option

This option consists of two alternative increases in the excise tax rates on motor fuels. Under the first alternative, federal excise tax rates on gasoline and diesel fuel would be increased by 15 cents per gallon. Under the second alternative, those tax rates would be increased by 35 cents per gallon. Under each alternative, the tax would be indexed for inflation each year.

Effects on the Budget

According to estimates by the staff of the Joint Committee on Taxation (JCT), the first alternative would increase revenues by $237 billion from 2019 through 2028; the second alternative would increase revenues by $515 billion.

The higher excise taxes would reduce taxable business and individual income. The resulting reduction in income and payroll tax receipts would partially offset the increase in excise taxes. The estimates for the option reflect that income and payroll tax offset.

The revenue estimates also reflect drivers' anticipated responses to higher fuel taxes: By increasing the retail prices of motor fuels, the taxes would reduce fuel consumption (relative to what it would otherwise have been) both by discouraging driving and by encouraging the purchase of more fuel-efficient vehicles. Because the second alternative would be more salient to consumers, it would provoke greater responses, causing steeper reductions in fuel consumption. That is why, although the 35-cent tax increase is 2.3 times greater than the 15-cent increase, the revenues from the larger tax would be less than 2.3 times the revenues from the smaller tax.

The estimates for this option are uncertain because both the underlying projection of fuel use and the estimated responses to the change in the tax rates are uncertain. The projection of fuel use relies on CBO's projections of fuel economy and transportation choices under current law, and those projections are inherently uncertain. The estimates also rely on estimates of how individuals would respond to changes in the price of transportation resulting from increases in fuel taxes. Those estimates are based on observed responses to prior changes in taxes, which might differ from the responses to the fuel tax changes considered here.

Other Effects

One argument for increasing excise taxes on motor fuels is that the rates currently in effect are not sufficient to fully fund the federal government's spending on highways and transit. That spending has exceeded annual revenues from the fuel tax in every year since 2000. Federal tax rates on motor fuels were last increased in 1993; since then, the costs of labor and materials for maintaining and building highways and transit infrastructure have grown. CBO projects that if current law remained in place, a transfer of general revenues from the Treasury to the Highway Trust Fund authorized by the Fixing America's Surface Transportation Act would allow the fund to meet its obligations through 2020, but not in later years. For many years, the Congress has directed that roughly 80 percent of the taxes on motor fuels be credited to the trust fund's highway account and roughly 20 percent to its transit account. If those proportions remained the same under this option, and if funding for highways and transit was indexed for inflation, both of these alternatives would enable the Highway Trust Fund to meet its obligations through 2028 and beyond.

A second argument in favor of the option is that when users of highway infrastructure are charged according to the marginal (or incremental) costs of their use—including the "external costs" that such use imposes on society—economic efficiency is promoted. Some of the external costs—those associated with climate change and dependence on foreign oil—are directly related to the amount of motor fuel consumed. Imposing excise taxes on fuel therefore creates incentives to use highways and mass transit systems more efficiently. Because current fuel taxes do not cover those marginal costs, raising fuel tax rates would more accurately reflect the external costs created by the consumption of motor fuel. The second alternative would have a greater impact than the first because increasing the tax rate by a greater amount would create stronger incentives for taxpayers to drive less and to purchase more fuel-efficient vehicles. A further argument for the option is that increasing excise tax rates on motor fuels would incur relatively low collection costs because such taxes are already being collected.

An argument against this option is that because the two largest external costs of motor vehicle travel—traffic congestion and pavement damage—are not directly related to fuel use, it might be more economically efficient to adopt policies based on measurable factors that are more closely related to those costs. For example, imposing tolls or charging fees for driving at specific times in given areas would be more direct ways to alleviate congestion. Similarly, a levy on the number of miles driven by heavy trucks, reflecting their weight per axle, would more directly address the costs of pavement damage. However, creating the systems necessary to administer a tax on the number of vehicle miles traveled would be much more complex than increasing the existing excise taxes on fuels. Moreover, because fuel consumption has some external costs that do not depend on the number of miles traveled, maximizing economic efficiency would still require taxes on motor fuels.

Some other arguments against raising the tax rates on motor fuels involve issues of fairness. Such taxes impose a proportionally larger burden, as a share of income, on middle- and lower-income households (particularly those not well served by public transit) than they do on upper-income households. Those taxes also impose a disproportionate burden on rural households because the benefits of reducing vehicle emissions and congestion are greatest in densely populated, mostly urban, areas. They also disproportionately burden drivers of conventional gasoline- or diesel-powered vehicles, as drivers of battery-assisted or fully electric vehicles pay little or nothing in fuel taxes. Finally, to the extent that the trucking industry passed on the higher cost of fuel to consumers (in the form of higher prices for transported retail goods, for instance), those higher prices would increase the relative burden on low-income households, which spend a larger share of their income (compared with higher-income households) on food, clothing, and other transported goods.