Fuel Tax: Road to Ruin

No easy way out of looming shortfall in the Highway Trust Fund

By
Samantha Oller, Senior Editor/Special Projects Coordinator

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“In the short run—the next three to four years—you will probably see a substantial gas and diesel tax just because it’s the devil they know, and they desperately need money for roads,” says Dan Gilligan, president of the Petroleum Marketers Association of America (PMAA), Arlington, Va.

“They’ve got to start looking at other alternatives—a VMT tax, or start putting computer chips in cars so when you pull into a gas station, it can tell how big the car is, how many miles were driven,” Gilligan says. He also believes a tax on hybrids and other alternative-fuel vehicles is needed, so that these drivers can pay their fair share toward maintaining the infrastructure.

Then there is the question of whether a higher tax would affect fuel demand and, ultimately, revenue.

“Will it have an impact on prices? Yes, of course it would; it’s raising the cost of fuel, and that cost ultimately gets passed on,” says David Zahn, director of marketing for FuelQuest Inc., a Houston-based fuel-management and tax-automation solutions provider that tracks fuel-tax issues. “Would people notice it from year to year? Maybe. Fuel’s very volatile and tax is only a small part of the price.”

As to whether it would curb demand, Zahn cites other factors—such as  increasing fuel-mileage standards—that already have cut consumption.

Greg Cohen is president and CEO of The American Highway Users Alliance, a Washington, D.C.-based coalition of AAA clubs, trucking organizations, bus companies, the RV industry, motorcycle associations and other related groups. For his group’s part, the HTF is a solid program.

“It’s a system that’s served us well. It’s based on the principle that the user pays, the user benefits,” he says. The problem is the sustainability of its funding.

“At minimum, we’ve got to tie it to inflation,” says Cohen. “We also need to look at some sort of way to tie it to the growing fuel efficiency of vehicles. If we really do get to 54 miles per gallon on average—which is the goal for 2025—there should be some sort of automatic adjustment to account for that so the amount of revenue raised per mile is the same.”

Cohen believes a VMT fee would be too unpopular because of the privacy issues, but he suggests tying the tax to a government-generated statistic of on-road fuel economy would work. At some point in the future, he says, purely electric-powered vehicles would need to pay a fee, but with less than one-half-percent of the vehicle fleet running only on battery, it is not an immediate issue.

“And maybe factors beyond that to consider include some look at the actual needs of the system,” says Cohen. “We’re open to different ideas. The key thing is: The revenue needs to be sustainable.”

The folks at FuelQuest propose a series of small steps, including tying federal and state fuel excise taxes to inflation. “That really isn’t a tax increase—it’s saying, ‘Each year, as there is inflation, we want to make sure we have the same buying power we had the year before.’ It’s keeping up with our infrastructure,” says Zahn. Second, the company proposes mandating electronic tax filing, which helps states collect the maximum amount of revenue owed.

In addition, taxation could be simplified either by moving taxation upstream or implementing more toll roads. “Other things that are more innovative, like reducing congestion of traffic with HOV lanes, can lessen the burden on our roads,” and allowing more flex time for work can also help alleviate the wear and tear on roads, Zahn says. “Those initiatives have had more traction than seeing the federal tax rate go up.”

For the short term, Congress may simply permit a transfer of funds from the U.S. Treasury to cover the shortfall in the HTF, which under law cannot have a negative balance. For the long-term, sustainable future, however, the fix is not clear.

“With the highway program, we’re looking at basically a 100% cut in funding next year,” says Cohen. “We have to do something. I’m optimistic there will be at least a serious effort to address the trust fund. Whether it can happen before election day or not, I don’t know. Part of that depends on whether there really is a public bipartisan acknowledgement of the problem.”

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