Navigant Research Blog

Neck Deep in Politics: Why Increasing the Gas Tax Makes Sense but Won’t Happen

Dave Hurst — December 6, 2010

Today the President’s deficit reduction commission (National Commission on Fiscal Responsibility and Reform) is due to vote on the recommendation to raise the federal gas tax by 15 cents by 2013. This increase was part of the commission’s draft plan to reduce the deficit by $3.8 trillion, and all the funding raised by this tax increase would be “dedicated to fully fund the transportation trust funds and therefore eliminating the need for further general fund bailouts,” according to co-chairmen Democrat Erskine Bowles and Republican Alan Simpson’s proposal. The transportation trust fund is what pays for roads and bridges, and has been bankrupt requiring infusions from the general fund.

A hike in the federal gas tax is long overdue and likely dead on arrival. Since 1993, the current federal gas tax has been 18.3 cents, which due to inflation has the spending power of closer to 12 cents and is why the trust fund cannot pay for itself. Gas tax proposals in the past have garnered essentially no political support. The new congress is lead by Republicans who vehemently oppose raising taxes, while Democrats, who are more likely to consider some tax increases, oppose regressive taxes paid by everyone including the poor and unemployed. In this political climate, increasing the gas tax seems not just unlikely but almost far-fetched. However, supporters of the gas tax increase can take some solace in support from most economists, environmental scientists, and the U.S. Chamber of Commerce (who almost always opposes taxes as a general rule).

Regardless of the politics, a change in the gas tax is likely the fastest way to promote more environmentally-friendly driving among consumers. I am already on record as opposing the CAFÉ rules because they completely ignore the consumer market. For example, without added economic incentive for even modest fuel-saving solutions (or an outright requirement), products like start-stop systems (micro hybrids) receive a very chilly reception in the U.S. market.

In Europe, there are 27 vehicle models featuring start-stop available, while in the U.S. there are only two. The argument over whether to include start-stop systems becomes an argument about how vehicles are tested for their emissions and fuel economy ratings, rather than a market-based value for the dollar discussion. OEMs are forced to assess whether a 1% gain (or less) in their CAFÉ ruling is worth the extra several hundred dollars in cost. In essence, that cost would just come off their bottom line since the fuel economy gains of start-stop systems will be measured in tens of dollars per year at current gas prices.

But start-stop systems are not the only loser in this battle over fuel taxes. Natural gas, LPG, electric and even some hybrids vehicles (particularly heavy duty trucks) are all forced to rely on tax incentives. At the current price of gas and diesel, many of these vehicles’ upfront costs are high enough that the total ownership cost remains higher than that of a gasoline vehicle.
While a 15 cent gas tax is probably too modest to really have an impact on any of these issues, no added gas tax won’t even bring the much needed extra revenue.

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