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Economy / Taxes

Indexing Fuel Taxes

By Jakob Puckett on May 6, 2021
Gas prices
Waclaw Koscielniak / Shutterstock

Paying tax on gasoline or diesel fuel by the gallon makes intuitive sense—the more gas you buy, the more tax you pay. But in this case, our intuition isn’t doing us any favors. The per-gallon model for taxing fuel doesn’t account for inflation or the increased fuel economy of newer cars, and those two factors are making it harder to pay for the upkeep of our roads and bridges.

In addition to a 17-cent-per-gallon state fuel tax, Missourians pay federal fuel taxes on gasoline and diesel fuel of 18.4 and 24.4 cents per gallon, respectively. This federal fuel tax revenue is deposited into the Federal Highway Trust Fund (HTF), from which money is sent to each state—and money from the federal government is the largest part of the Missouri Department of Transportation’s road and bridge budget. In 2020, MoDOT received almost a billion dollars from the HTF, making up nearly 40 percent of MoDOT’s road and bridge budget. In fact, for every $1 that Missouri drivers contribute to the HTF through federal fuel taxes, MoDOT gets $1.21 back. Obviously, it’s in Missouri’s best interest to keep the HTF healthy.

But the HTF isn’t looking so good these days, because its mechanism for generating revenue hasn’t aged well. Fuel taxes are charged by the gallon rather than as a percentage of the purchase price, so they don’t automatically keep up with inflation. The price of gas has gone up a lot since 1993, but regardless of whether you paid $1.25 or $2.50 per gallon during that time, the federal tax on each gallon has been stuck at 18.4 cents (or 24.4 cents for diesel fuel) for the past 28 years. Meanwhile, inflation has increased all the costs associated with road maintenance and repair. Worse yet, the costs of road construction equipment and materials have risen faster than overall inflation. As a result, each dollar raised from the fuel tax now has one third of the purchasing power it had in 1993.

In theory, a per-gallon fuel tax can still bring in increasing revenue over time as more drivers hit the road and log more miles every year. This is exactly what would have happened, except that improvements in vehicle fuel efficiency (not to mention the advent of electric cars) have decreased the amount of gas we buy for each mile we drive.

So where does that leave us? Fuel tax revenue is no longer sufficient to cover the HTF’s expenditures, and Congress has resorted to transferring money from the general revenue fund just to keep the fund solvent. This is at best a short-term fix that doesn’t solve the HTF’s core problem, adds to the national debt, and should hardly make Missourians feel comfortable. The fund we depend on for almost 40 percent of our road and bridge budget can’t support itself anymore. Up to this point, the federal government has covered the shortfall, but can we count on that to continue?

At the federal level there appears to be some recognition of the problem. A bipartisan group of 58 members of Congress has proposed indexing the federal fuel tax to some combination of inflation, construction costs, and fuel efficiency to keep it current with the times. The exact mechanism for the indexing hasn’t been determined, but the proposal is a promising start. Perhaps of more interest to Missourians is that several states have already indexed their own fuel taxes to measures like these. Policymakers here should consider indexing our fuel tax as well, since state fuel tax revenues have stayed practically the same for the last 17 years.

If we believe that quality roads and bridges are important for Missouri’s economy, then it makes no sense to allow the funding source that pays for them to remain stuck in the past.

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About the author

Jakob Puckett

Analyst

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