Saturday, May 03, 2008

What to do about the gas tax?

Several weeks ago John McCain floated the idea of suspending the federal gasoline tax for the summer. Hillary Clinton seconded the plan more recently and added to it the idea of a windfall profits tax on oil companies. Barack Obama objected to lifting the gas tax, but favored the windfall tax.

McCain and Clinton each make good point. Neither has proposed that this is a solution to long-term problems, but rather a short-term benefit to consumers. The 18.4 cents per gallon that gasoline consumers pay in federal taxes will probably not drop the price of gas below $3.00 a gallon, but if people and families are planning to take any driving vacations this summer (or even if they just want to get back and forth to work) they will likely notice it.

Barack Obama countered that most gasoline consumers would only save about $30 over the course of the summer (as far as I know, he hasn't shared his methodology for getting to this estimate). He's also made the back-up argument, in case people think an extra $30 isn't so bad, that reducing the federal tax might cause the the price of gasoline to rise to the point that the tax reduction would be offset, anyway. (As far as I know, he has not ventured a theory about whether imposing a windfall tax on oil companies might also raise the price of gas).

What I think is interesting about this debate is that both positions on the gas tax are pretty reasonable. Gasoline taxes (as part of a tax on diesel and liquefied petroleum gas) are levied at both the state and federal levels. This map shows the combined gasoline tax rates, as of January 2008, for the 50 states.

Texas is on the low end of the spectrum. The 18.4-cent federal tax is combined here with a 20-cent state gasoline tax (if you wonder why the phrase "fiscal crisis" gets used so often in relation to Texas, consider that this nationally very low tax rate is one of our largest sources of state revenue).

The majority of the revenue collected from these taxes, at both the state and federal levels, goes to pay for highway construction and maintenance. The costs of steel and concrete have risen considerably in the last several years (by some estimates by as much as 300%). Neither the federal nor the Texas state gas taxes have been raised in some time. This means that the purchasing power of each of these taxes has fallen dramatically.

The state tax was raised to 20 cents per gallon in 1991; the federal tax has been at its current rate since 1993. The state gasoline tax in Texas is now worth 13 cents in adjusted dollars; even less than it was worth in 1991. The federal gas tax is worth about 12 cents per gallon in adjusted dollars. (The Bureau of Labor Statistics website has a handy and fun inflation calculator.)

What this means, is that the gas tax is pretty useless at its present rate. McCain and Clinton have a strong leg to stand on here: why should we keep collecting a tax that's so far out of proportion to the costs of what it pays for? It's a small drop in the bucket of highway costs. If consumers will notice the extra money they save, whether it's $30 or $130, then maybe it is actually more effective as a repealed tax than as a collected one.

Obama also has a good point here, though. Even though the taxes don't come anywhere near covering the costs of highway construction and maintenance, should we really make the situation worse by not collecting it during the busiest driving season of the year?

If the gas tax is going to stay (whether at the federal or state level) then it only makes sense to not only raise it, but index it, as well, so it continues to rise with some indicator of inflation. The problem, of course, is that concrete and steel costs rise so sharply each year that indexing the gas tax to them would make gas very, very expensive very, very quickly.

Indexing it to something that rises more predictably, like the overall consumer price index, still only adds a couple tenths of a cent each year for the next few years. The gas tax is not going to be able to cover infrastructure costs anymore. (State Representative Mike Krusee also made a compelling argument in favor of abolishing the tax altogether last week at the Texas Transportation Forum).

If there isn't the political or popular will to raise the gasoline tax right now, then why not get rid of it? Why collect a futile tax?


Fox said...

My first question... I always seem to start comments on your blog with questions!! ... is why are the prices of concrete and steel so high?

I'm guessing that we import steel from China? Correct? If so, then why do we continue to outsource our steel production if doing so causes the cost to rise 300%?

I agree with people like David Brooks and Thomas Friedman that we need to focus on "manufacturing" services, and to breed sharp minds to keep up with the brainiacs in India etc., but surely we have the labor force to create cheaper industrial products on our own shores.

As for the gas tax... I don't know, yet. You laid it out really well, I just don't know if I feel strongly either way. Surely I would like a little savings in my wallet, but if cutting the tax at the pump is just gonna cause it to rise at some other taxable area, well then it just seems like political posturing. (NOTE: I don't really frown on the posturing. They're all doing it. I'd just like to know the full transparency of the situation.)

One last question :)

I'm doubtful, but is there some type of resource where the public can track the flow of tax dollars that are taken from a specific source? Meaning, if I'm skeptical that revenue from a gas tax increase will ACTUALLY go straight to roads/bridges or alternative fuel sources research, can I verify that somehow?

bryan h. said...

I don't know why the prices of steel, concrete and other construction materials have raced so far ahead of inflation. I don't think it's a reflection of the cost of production so much as that of demand for the finished product. There's a pretty much constant need for highway and other infrastructure work, not to mention retail and housing and I suppose that high demand drives up the price.

Also, though, and this speaks to your comment about Brooks and Friedman, our economy has fundamentally changes over the last few decades. We don't really produce much anymore here; it's financial and consumer services that are our main exports now. We've shifted away from having our economy be based on production of things.

As for tracking the flow of your tax dollars, there are ways to do it. This has been something Susan Combs, our state comptroller, has taken very seriously. This part of her agency's website tells you what is being paid to who and for what with state money.

The state (as well as the City of Austin) also has an auditor's office that keeps track of whether money is being collected and spent appropriately.

You can also go to the Legislative Budget Board's website, and on the upper left of the homepage you can click on and download the General Appropriations Act. It's a huge document, but it will tell you exactly how the state is spending all your tax money:

At the federal level, I would think the GAO has audit reports, and the Senate and House of Representatives may each have things to look at.

For something like the gas tax, the spending of that revenue is directed by law; it has to go into the relevant state or federal highway fund (though 25% of of Texas gas tax revenues goes to something called the Permanent School Fund, and I imagine the federal tax also has some legally mandated diversions). But, yes, if you have the patience you can follow all of this.

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