Editorial Board

Put a Percentage in Your Tank to Fix the Motor-Fuels Tax: View

U.S. highways and mass transit are supposed to be federally supported in a fairly direct fashion: through a per-gallon tax on motor fuels, imposed at refineries and passed on to consumers.

The tax has the virtue of fairness in that it functions close to a user charge and encourages conservation by promoting mass transit. However, revenue from the tax is insufficient to sustain the U.S. transportation network.

The bulk of the charge is set to expire Sept. 30. Though tax aversion is running high on Capitol Hill, Congress should renew the gas levy. But lawmakers shouldn’t stop there. They need to get started on overhauling the way the outmoded tax is assessed, to ensure it raises adequate revenue in the future.

A little history: Since 2008, the motor-fuels tax has fallen about 30 percent short of covering the federal government’s costs of fixing roads, bridges and tunnels and supporting the country’s mass-transit systems. So, money has been drawn from general funds (income taxes) to close the gap.

Why the shortfall? Since the levy was last increased in 1993 -- to 18.4 cents a gallon for gasoline and 24.4 cents for diesel -- it has lost about a third of its value to inflation. And since 2008, with the economic downturn, Americans have been buying fewer gallons of gas, and thus paying less in taxes.

The improving fuel efficiency of the U.S. fleet has reduced tax proceeds further. In 1993, when the average new car in the U.S. got 28.3 miles (45.5 kilometers) per gallon, the fuel tax amounted to 0.65 cent per mile driven. Last year, the average mpg for a new car was 33.7, so the government collected 0.55 cent per mile, 15 percent less. This trend will continue as gas mileage keeps improving. As more electric cars hit the roads, proceeds will drop more.

Raising the fuel tax now might damage consumer spending power. Instead, President Barack Obama should propose that Congress renew it at current levels, but only for a year at a time, and then, once the economy is solidly recovering, increase the charge in stages to cushion its effect on consumers.

It’s also important to change the way the tax is structured. Instead of being tied to the number of gallons purchased, it should be levied as a percentage of the value of the gasoline purchased.

Today, U.S. consumers pay, on average, $3.68 for a gallon of regular-grade gas. About $2.87 of that is the cost of the gas itself, $0.18 is the federal tax, and the rest is other taxes plus distribution and marketing expenses. To fill the 30 percent hole in the federal budget for roads and mass transit, and to build a cushion in case gas prices dip, Congress could increase the amount the federal tax brings in by 40 percent. That would translate to a 9 percent tax on the gas itself. For consumers, such a change, at today’s prices, would mean paying $3.75 per gallon at the pump, a 7 cent bump.

Nobody likes paying more for gas. It’s worth pointing out, however, that the U.S. is the only country in the 34-member Organization for Economic Cooperation and Development in which user charges don’t completely cover government transportation expenditure.

What’s more, Americans pay far less for gasoline than their counterparts in Europe. The average cost of a gallon of gas is $8.47 in the U.K., $8.20 in Germany and $8.75 in France; in each of these places, more than half the retail price is tax. And the effect of such high charges has been to push consumers to use public transportation more, and to buy more fuel-efficient cars.

There are other possible solutions. One highly favored by transportation experts is to charge drivers not by gas consumed, but by mile driven. Though a promising idea for the future, this could mean installing in-vehicle meters, raising concerns about drivers’ privacy.

For now, we should focus on renewing the tax -- a move that even the anti-tax crusader Grover Norquist condones. It should then be raised and changed in a way that will both improve America’s deteriorating highways and transit systems and reduce overall oil consumption.

    To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .

    Before it's here, it's on the Bloomberg Terminal.