California Proposal for Mile Tax to replace Gas Tax – Part 2 – Side-Effects of Fuel Economy and Inflation

26 Jan

This is Part 1 of “Exploring a Road Usage Charge as an Alternative to the Gasoline Tax” released by CalSTA (California State Transportation Agency).

Effects of Vehicle Fuel Economy

New Corporate Average Fuel Economy (CAFE) standards, alternative fuels, and the rise in the popularity of electric vehicles, combine to create a rapidly deteriorating funding situation. These are positive results from other statewide policy initiatives, but the primary state transportation revenue source for maintenance and operations has been the flat-rate excise tax of 18 cents placed on each gallon of gasoline sold. While sales tax (later replaced with a “price-based” excise tax) was shifted to transportation beginning in 2000, only the base 18 cents provides funding for “fix-it-first” activities including maintenance and rehabilitation of the state’s transportation system. The excise tax has long been used as a proxy for a user fee, but as vehicles become more efficient, this proxy is becoming less effective.

calsta - revenue loss due to increases in fuel economy

The emphasis on increased fuel economy is undeniably desirable. From an environmental and energy policy standpoint, decreased fuel consumption reduces greenhouse gasses and our dependence on a finite energy source. However, as we strive to reduce fuel consumption, we undercut the primary funding source for repair of the roads that all cars, trucks, and busses rely on – regardless of the energy source that they use, or how efficient the vehicle they drive is. There is no equitable means to mitigate these effects so long as we continue to rely on the antiquated per-gallon excise tax.

By 2030, as much as half of the revenue that could have been collected will be lost to fuel efficiency. If that sounds farfetched, consider that 20 years ago in 1994, the average fuel economy of cars on the road in the United States was just around 20 miles per gallon (MPG); today the average efficiency of new cars sold exceeds 35 MPG. By comparison, 35 MPG was the average fuel economy of all passenger cars sold in the European Union (EU) in 2001, and by 2011 it had increased to 42 MPG, with average highway ratings exceeding 50 MPG. As new, more efficient, cars replace the older models, the effect on consumption and average fuel economy of the fleet will increase rapidly. On the other hand, revenue from the gas tax will decline dramatically. Estimates suggest that the decrease in revenue due to fuel efficiency will soon outpace even the negative impact of inflation.

Complicating the issue somewhat is the interaction of increased fuel economy with the use of diesel fuel that is taxed at a lower rate than gasoline. The market share of diesel passenger vehicles in the United States is currently around 1 percent. Based on experiences in the 1980s drivers in the United States have been soured on diesel cars, viewing them as noisy, dirty, and unreliable. But modern diesel systems are touted as clean, powerful, and fuel-efficient. In the EU, 55 percent of passenger cars sold in 2011 were diesel-powered. Because modern diesel cars are more fuel efficient than gasoline-powered equivalents, this move to diesel power has helped the EU to achieve outstanding average fuel efficiency and commensurate greenhouse gas reductions.

Recent years have seen the marginally successful re-entry of diesel passenger cars into the United States market, and estimates by some expert sources indicate that the market share of new diesel passenger cars sold could increase to 10 percent by 2020. But, because diesel excise tax was reduced to 10 cents per gallon (from 18), a shift in fuel source would negatively impact transportation revenues available under the existing tax structure.

Effects of Inflation

Even absent changes in tax revenue due to fuel efficiency, the state faces another losing proposition in the excise tax: inflation. The base excise tax, which provides the funding for the maintenance of our highways and local roads, has remained unchanged since 1994. This rate has been in place for 20 years, despite significant increases in project construction costs. Since that time, despite the economic crisis of 2008, the buying power of the tax has decreased about 42 percent in terms of construction costs. To flip that around, if the base 18 cents-per gallon tax had been indexed to inflation back in 1994, it would be about 31 cents per-gallon today.

calsta - what is the gas tax worth

The chart above illustrates how inflation has reduced the purchasing power of 1994’s 18 cent gas excise tax to the equivalent of a 10.5 cent tax. A further adjustment for increased VMT would reduce the purchasing power to the equivalent of 9.0 cents per gallon (half the value).

The effects of inflation must be addressed if California is to be successful in both improving the condition of transportation infrastructure and maintaining the improved condition. The means of doing so is tie the tax to an index that changes with the cost of goods and services. The Consumer Price Index may be the most well known, but the Producer Price Index, or even the California Highway Construction Cost Index are more consistent with construction price changes.

The gasoline excise tax was raised multiple times between its initiation in 1923 and the last increase in 1994 to account for the effects of inflation. Indexing annually for inflation can alternatively be authorized and reduces the purchasing power erosion between longer-term adjustments. Regardless of the type of long-term solution implemented to provide appropriate funding for transportation, the effects of inflation must be surmounted and annual indexing considered.

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