Oil Is Down. Gas Taxes Should Go Up.

An opportunity at the pump.

Whenever the price of oil spikes, it's a sure bet that some U.S. politicians will propose another gas tax holiday. So now that oil has fallen below $85 a barrel, and with America's highways and mass-transit systems starved for funding, is anyone in Washington sensibly calling for a gas tax increase?

Of course not. Raising the gas tax is bad politics -- and will remain so even after the November elections. But the economic case for a gas tax hike is compelling, and Congress should be paying attention.

America's old and creaky transportation infrastructure is a significant drag on the economy. Last year, roadway congestion cost Americans $124 billion in lost time, wasted fuel and higher business costs. Many economists -- led by Larry Summers -- believe that massive public infrastructure investment that expands economic capacity is the best hope for shaking the U.S. economy out of its low-growth, stagnant-pay doldrums.

The federal gas tax is the primary source of highway and mass-transit funding, but Congress hasn't increased it since 1993. Back then, a tax of 18.4 cents a gallon was the right amount. But inflation has since cut its value by 40 percent, and rising fuel efficiency, coupled with the proliferation of hybrid vehicles, has also reduced its value.

Last summer, Congress had to punt on a long-term transportation-funding bill because, with no gas tax increase, there was no money to pay for it. Instead, lawmakers came up with a 10-month fix financed largely through accounting gimmicks, which means they will have to deal with this issue again in the spring. The recent drop in oil prices -- a gallon of gas is now less than $3 in several states -- creates an opportunity to revisit the challenge a little early.

To remove some of the political sting involved, congressional leaders could peg an increased gas tax to the price of oil -- so that if oil prices rise again, the tax would come down, at least a little. Keeping the gas tax somewhat elevated is good policy, however, because higher gas prices incentivize fuel economy, which helps reduce air pollution, including carbon emissions. Indeed, the gas tax is a form of climate-protecting carbon tax.

In the event Congress still chooses not to act, states can still tie their own gas taxes to the price of oil -- and invest the extra revenue wisely in public transit and road safety.

States and localities already account for 75 percent of transportation funding, and they are becoming increasingly impatient with Washington. This year, six legislatures (in Louisiana, Maryland, Missouri, Rhode Island, Texas and Wisconsin) have placed measures on the November ballot to increase spending on roads, bridges and other transportation infrastructure. Other states are actively courting private capital for major projects.

Oregon, for its part, will begin a pilot program next year to allow 5,000 volunteer car owners to skip paying the state gas tax and instead pay a levy on total vehicle miles traveled. This is an idea that has won support from liberal and conservative thinkers alike; even Representative Bill Shuster of Pennsylvania, the Republican chairman of the House Transportation and Infrastructure Committee, has said he's open to it. As fuel standards continue to improve in years ahead, further diminishing gas tax revenues, a tax on vehicle miles traveled will become an increasingly attractive option. And Congress, as much as states, will need to take a serious look at it.

For the moment, though, low oil prices are presenting an unexpected opportunity to quickly raise the money that U.S. highways need: Simply increase the federal gas tax.

--Editors: Francis Barry, Mary Duenwald.

To contact the editor on this story:
David Shipley at davidshipley@bloomberg.net