• Unsustainable in the Long Tern -The sustainability of fuel taxes, particularly on gasoline, gasohol, and specialty fuels (gas taxes), as the primary source of federal surface transportation funding beyond the next 10-15 years is questionable, at least without significant increases in tax rates. The optimistic case-based on official government forecasts that average light-duty vehicle efficiency will increase gradually though 2030 and that vehicle travel will grow at a slow but consistent rate-is that without a change in the rates charged, gas tax revenues will experience slow nominal growth over the long term and decline in real (constant dollar) terms. These estimates of average vehicle fuel efficiency are based on assumptions related to the new Corporate Average Fuel Efficiency (CAFE) standards, historical trends in fleet turnover, and conventional influences on travel behavior. They do not reflect the potential impact of major advances in vehicle fuel efficiency and alternative fuel vehicles, future spikes in oil prices, or greater public concern about and government action to address climate change and dependence on imported oil. Although it is not currently feasible to substantiate the combined effect of these factors, they could converge to greatly reduce the long-term effectiveness of gas taxes (at current rates) as a source of funding for transportation. As noted, however, significant improvements in the fuel efficiency of freight trucks are expected to occur at a much slower rate, thus diesel tax revenues are a much more sustainable source of long-term funding for the HTF
• Declining Public/Political Support for Increases-Historically, motor fuel taxes have enjoyed a reasonable degree of public acceptance compared with other forms of taxation, largely due to the close relationship between tax payment and benefit and to general public support for highway system construction. In recent years, however, support for motor fuel taxes (particularly for any increases) has been greatly diminished. As noted in the TRB Fuel Tax report, this decline in support can be partially attributed to dilution of the original user- pay concept of the fuel taxes through earmarking practices, to funding diversion away from surface transportation investments, and to de facto devolution of responsibilities to local governments that tend to rely on non-user fees to fund transportation. The decline also can be attributed to the transition in agency missions to less publicly appreciated goals (e.g., maintaining versus building the system), to perceived inefficiencies in transportation spending, and to broader political trends such as general opposition to any tax increases.
• Weak Promotion of Efficient Use and Investment-The current surface transportation funding system, with taxes on motor fuels as the cornerstone, is not optimal for promoting efficient system use or investment. This is a particularly relevant limitation in urban areas, where being able to maximize the efficient use of constrained capacity is critically important. Although it is generally true that users pay more fuel taxes the more they drive, those tax-related costs are not linked to time of travel or facility choices and do not necessarily recover the full costs of an individual's travel decisions (for example, total system costs of driving on congested roads is more than driving on uncongested ones). Thus, fuel taxes at current rates are not optimal for influencing efficient system use beyond the extent that they can reduce total driving. But even this effect is severely muted by the relatively low level of the current tax (compared with the total cost of fuel) and its relatively hidden nature.
• An additional factor limiting efficient use is that numerous federal provisions provide exemptions from paying MFTs for certain users such as state governments and political subdivisions, nonprofit education organizations, and emergency vehicles; for fleet operator evaporation allowances; and for motor fuels used off-road for agricultural purposes. Although these various exemptions and refunds had valid political support and economic rationale in the past, the Commission believes that Congress should review and re-evaluate those reasons in light of current circumstances and current levels of HTF reduction. They also reduce HTF revenues, with combined exemptions and refunds totaling more than $1 billion in 2007.15
Because revenues from the gas tax are not related to where the vehicle is driven or the costs of providing the roads in that area, motor fuel taxes can also lead to less efficient system investment, particularly in urban areas with high congestion levels where direct user fees could pay for most or all of new project costs. As a result, efficiency in the choice and prioritization of projects depends on administrative and political choices that may not be closely related to "where" the revenues are raised. In particular, Congress has required, and the U.S. Department of Transportation and the states and local governments have implemented, planning and programming processes that take into account numerous factors, including economic development, pavement preservation, and environmental issues. Although these requirements have been credited with greatly improving project prioritization and selection, they are reactive in nature and may still not lead to the most efficient investments being made, since investments are often made, to accommodate congestion caused by inefficient travel decisions by users. | Reliance on motor fuel taxes provides only a weak proxy for capturing the costs of environmental damage and other negative impacts such as congestion and system wear and tear. |
|
• Charging for Negative System Impacts-Reliance on motor fuel taxes generally pro- vides a weak proxy for capturing the costs of environmental damage and other negative impacts such as contribution to congestion and system wear and tear. As an indirect user fee, fuel taxes do bear some relationship to both emissions and wear and tear on the system. But while heavy trucks with fewer axles pay more in fuel taxes than lighter trucks with more axles, the added costs of wear and tear they impose normally exceed the added revenue from the higher fuel consumption. Likewise, while vehicles with poor fuel efficiency pay more in fuel costs and fuel taxes, the added costs from pollution normally exceed the added revenue from higher fuel consumption.
• Regressive Taxation-In general, lower-income individuals spend a larger share of their income on fuel taxes than wealthier individuals do. Thus the fuel tax is highly regressive. As noted in a recent report by the Tax Foundation, the gas tax burden on families earning less than $10,000 per year is more than 10 times the burden on families earning more than $150,000 per year (as a share of income).16 Similarly, a 2007 study by the Texas Office of the Comptroller compared the incidence of different taxes, using the Suits Index,17 and found that gas taxes are more regressive than several other taxes, including a general sales tax. A mitigating consideration is that lower-income individuals on aver- age drive significantly fewer miles than people in other income groups.18
• Compliance Considerations-Although progress has been made to stem fuel tax evasion in recent years through legislative changes and increased enforcement efforts, compliance remains a concern. As detailed in a recent study by the Montana Depart-merit of Transportation, several approaches are being used to avoid paying state and federal gas and (especially) diesel taxes, ranging from inappropriate use of agricultural exemptions to reporting fraud and outright theft.19 The total amount of revenue lost to fuel tax evasion (federal and state combined) has proved difficult to quantify, Put it could exceed $1 billion annually (3.5 percent of total federal motor fuel tax revenues).20