Of all taxes imposed by the federal government, perhaps none is more detested than the federal gas tax. At 18 cents a gallon, it is the second-lowest in the 34 Organization for Economic Cooperation and Development (OECD) member countries, just above Mexico, and well below the average OECD rate of $2.40 cents a gallon (Great Britain is about $3.55 a gallon). Americans also enjoy the second-lowest overall energy taxes in the OECD and the second-lowest taxes on carbon emissions.
Yet Americans still think the gas tax is too high. In a 2011 survey commissioned by the Rockefeller Foundation, Americans were asked when they thought the federal gas tax was last raised. More than 60 percent thought it was raised every year. In fact, it was last raised in 1993. In 2012 the deficit-averse Tea Party Congress was faced with letting the Highway Trust Fund (funded by the gas tax) go bankrupt, raising the tax or transferring more than $20 billion in new debt from the U.S. Treasury to keep the fund afloat for two years. Its pick? More debt.
Despite this widespread disdain, the gas tax has many virtues. It is a true user fee, paid by the users of the highway system. It applies the common-sense economic principle that people who benefit from imposing a burden on society — burning gasoline has a variety of adverse effects on human health and the environment — should pay a tax representing the marginal costs imposed. It has very low administrative costs, and it is a tax on carbon, which settled science says is warming the planet. If this tax simply covered the costs of building and maintaining the U.S. federal-aid highway system, it would lower the debt — in actual costs and deferred maintenance — by more than $100 billion a year.
The lengths legislators will go to avoid raising the gas tax was highlighted by recent action championed by Gov. Robert McDonnell of Virginia and adopted by the state legislature. Facing a $1 billion deficit in state transportation needs, it decided to cancel the gas tax outright. It was replaced by a 3.5 percent wholesale tax on motor fuels, even though the gas tax itself is collected at precisely the same place — wholesale distribution centers. Virginia also voted to raise its sales tax, both statewide and at a higher level in Northern Virginia and Hampton Roads. It also chose to distribute a greater percentage of sales tax revenues to transportation. But the sales tax still exempts gasoline. The only new fee Virginia chose to impose specifically on its highway users was to set a $100 annual registration fee on electric and hybrid gas-electric vehicles, which consume little or no gasoline.
The United States can do better, while supporting the economy, reducing pollution and stabilizing gasoline prices. The core principle is to tax the life-cycle carbon emissions of fuels used by the transportation system. Transportation fuels — still 94 percent derived from petroleum — emit carbon all along the fuel cycle, from upstream production, transportation to refineries, processing, distribution and consumption at the pump.
The best place to tax the relative carbon footprint of these fuels is when crude oil arrives at the refinery. Every barrel of oil has a carbon footprint associated with production that can be calculated and assessed, along with the carbon content of the crude itself, at this location. In addition to being more accurate in reflecting the costs imposed on society than a gas tax, a carbon tax imposed at the refinery level captures the carbon emissions released in processing the oil into gasoline. Also, because fully 16 percent of refined petroleum products produced by U.S. refineries are exported, to the extent refineries pass the tax downstream, the tax is exported as well. Because refineries may well have to sell these products on a global market, they may have to absorb the tax themselves, encouraging them to sell more product domestically. This will lower the cost at the pump because domestic supply will increase. The result: increased revenues with the costs distributed to upstream as well as downstream carbon emitters.
The gas tax will most likely never lose its bad reputation. But transportation energy taxes, when fairly applied all along the supply chain, can provide for more equal allocation of the costs to society from burning transportation fuels, encourage efficiency, raise more money to fund the U.S. transportation system, and help the planet. It’s got to be worth a try.