Federal Fuel Tax and Infrastructure Spending

Our infrastructure is aging. Politicians are realizing that revenues from fuel taxes are stagnating or decreasing and the cost to repair the Nations Roadways are going up. Countless studies have shown that more people are spending longer times on the road in their daily commute. This has a direct impact on our economy and will…

Our infrastructure is aging. Politicians are realizing that revenues from fuel taxes are stagnating or decreasing and the cost to repair the Nations Roadways are going up. Countless studies have shown that more people are spending longer times on the road in their daily commute. This has a direct impact on our economy and will hamper the future of the United States if we are not able to correct our infrastructure. While the average motorists shows the frustration of congestion on their daily commute, our professional drivers that move freight around the United States are also affected. So the debt that has transpired, “Do we need to raise the Federal and State fuel taxes to fix our infrastructure?”

An easy yes or no decision would be a decision that was not well thought out. We should also understand more about the history of Fuel Taxes, where those taxes go, and influences on why Fuel Taxes are coming into question now.

Most of us reading this have seen Federal and State Fuel Taxes on the pump as we fuel (As a point of reference I want to say for simplicity, when using the term “Fuel” we are talking about both gasoline and diesel fuel without otherwise indicated ). Federal fuel taxes have been in existence since 1932 and State fuel taxes since 1919 (Oregon being first) and by the end of the 1930's all 48 States and the District of Columbia had a State Fuel Tax system.

Currently, the federal tax on diesel fuel is $ 0.244 per gallon and for gasoline it is $ 0.184 per gallon. The American Petroleum Institute in July of 2013 reported that on average it was costing the American people $ 0.495 per gallon for gasoline and $ 0.548 per gallon for diesel fuel. These are Federal and State taxes combined.

Looking at the revenue aspect of this, the US Energy Information Administration says that in 2012, the United States on average consumed 172 billion gallons of fuel. Of that, 137 billion gallons was gasoline and about 35 billion was diesel fuel. That would equate out to $ 25.2 billion in revenue generated by gasoline taxes and $ 8.5 billion in revenue generated by diesel fuel taxes on the Federal level. Potential revenue generated from the Federal Fuel taxes would be $ 33.7 billion.

Using the weighed average from above, overall gasoline revenue generated from taxes would be $ 67.82 billion. Overall diesel fuel revenue generated from taxes would be $ 19.2 billion. Overall, Federal and State fuel taxes generated could be $ 87 billion.

So where does that money go? Those tax revenues on the Federal scale go into the Highway Trust Fund. This fund was established in the 1956 for the purpose of taking care of our roadways and interstates. In simple terms, this fund was created to collect all taxes and fees that were associated with vehicles using our roadways.

Revenue generated from fuel tax is not the only revenue put into the Highway Trust Fund. For owners of commercial motor vehicles, The Heavy Vehicle Use Tax (HVUT) is also included. For a vehicle with a gross vehicle weight of 26,001 pounds or greater, you pay annually an additional $ 550. The Highway Motor Carrier Branch of the Transportation Security Administration (TSA) reported that in 2007, there were 9 million commercial motor vehicles that fell into that class. Potentially another $ 5 billion in revenue generated through the HVUT. In addition to the HVUT, if you have ever bought tires or other items for your vehicle, you will notice a Federal tax that will also go to the Highway Trust Fund.

Politicians at some point had the foretight to create the Highway Trust Fund; thus the revenue was supposed to go there and not into the “General Fund”. Revenue generated for infrastructure was supposed to be earmarked for infrastructure. Now, in the need to satisfy some contingent, the Highway Trust Fund is broken down into three parts; The Highway Trust Fund, the Mass Transit Fund, and The Leaking Underground Storage Tank Trust Fund.

With the Highway Trust Fund broken into 3 parts, the revenues originally established to go into highway infrastructure is now broken up over various projects. While the majority of the tax revenues created are expected to go into the Highway Trust fund. All of us know that if you have three entities looking at the same pie, no one entity gets the entire pie. So those struggles are part of the budgeting process. While we see that the Highway Trust Fund is broken into three parts, States on their own make it difficult when they do not even have a fund established for infrastructure. At this point in time, 30 states take revenues generated from fuel taxes into their General Fund. For many states that are “cash strapped”, this has been a recipe for disaster. Is the legislature going to take care of infrastructure or pet projects that their constituents want? Unfortunately infrastructure spending is not “sexy” and few see a need till it is beyond too late.

All that being stated, is there a clear cut answer to what has to happen? Not really. The current level of Federal Fuel tax was set back in 1997 and has not been adjusted since. We realize that costs for materials and labor have not stayed at that same rate. More importantly, revenue from fuel taxes has stagnated or started to decline.

Couple of reasons for this, one is that our average length of drive has gone over the last 15 years or so. Modern conveniences are closer to us than before. We do not have to drive into town to get the groceries or see a movie. They most likely are now just down the street from us. Telecommuting and working from home are taking hold in the work place so the need to travel on business has been reduced. Second is government mandates. In the last couple of years, the Federal government has mandated that fuel economy improve on all vehicles. The benefit is that we burn less fuel and reduce pollution because of it. The flip side is there is less revenue coming in now because we are not buying fuel as frequently. So that double edge sword is swinging back.

What can be done? As stated before, there really is no clear cut right answer here. If we just arbitrarily raise the fuel taxes to another level, then there is that political hot potato of raising taxes. The Bookings Institute has proposed a mathematical formula for adjusting the price of fuel taxation to meet current construction cost and inflation. While this formula is the closest to reality, it is again a raise of the current level of taxation and we are relying on our political leaders to make the right decision. Grover Norquist, founder of the Americans for Tax Reform has made a solid case that the Federal government should not be in the business of infrastructure repair. His thoughts are those issues that should be handled at the State level where the people are.

All of these are a potential answer. While my belief is that we need to allocate revenues correctly; revenue bought in for infrastructure goes only to infrastructure, we may have let the system go too long to let that be an effective answer. My answer only highlights the issues currently at hand with our infrastructure, and those in the near future. If we want our economy to continue growing, we need to figure out a solution to this infrastructure mess. The motoring public and our professional drivers need an answer soon.