Navigant Research Blog

Is Fuel Efficiency Finally Starting to Drive Down Gas Tax Revenue?

Lisa Jerram — October 31, 2011

In October, the U.S. General Accounting Office released a report with a rather startling title:  “All States Received More Funding Than They Contributed in Highway Taxes from 2005 to 2009.” 

To explain, all U.S. states send money collected from fuel taxes and a handful of other fees to the federal Highway Trust Fund.  This money is then reapportioned back to the states in what has been often been a contentious process.  States that get back less than they contribute are considered “donor” states, and perhaps not surprisingly, they complain about this.  What this GAO report says is, from 2005 to 2009, every state in the U.S. was a “donee” state, receiving more from the Highway Trust Fund than it contributed.  The federal government chipped in additional money from general tax revenues to support states’ highway and mass transit investments.

So how did every U.S. state turn into a trust fund beggar in this period?

As noted, the Highway Trust Fund receives excise taxes collected on motor fuels, levied on gasoline, diesel fuel, gasohol, and fuels, as well as taxes related to trucks, trailers, and other heavy-use vehicles.  It has long been predicted that efforts to reduce hydrocarbon fuel consumption from the U.S. passenger vehicle fleet – whether through greater fuel efficiency, proliferation of electric cars, or growing use of other transportation modes — will start to reduce fuel tax receipts.  Has this finally happened?  Well, the GAO report says that the purchasing power of the trust fund dropped, in part because the federal gas tax rate has not increased since 1993.  And the report notes that contributions did decrease, but only from 2007 to 2008.  So, for the period through 2009, it’s not clear whether the fuel efficiency predictions had finally come true.  However, the Congressional Budget Office is forecasting another revenue shortfall by the end of fiscal year 2012.  And the GAO report concludes that fuel taxes may not be a viable long-term source of transportation funding as vehicles become more efficient and increasingly run on alternative fuels. 

This is particularly relevant right now because Congress is working on its next transportation authorization bill, which would set spending levels for another six years.  Congress will have to grapple with the issue of funding, in the midst of an election year cycle where discussions about revenue are constant fodder for politicking.

But the trends going forward are clear – all indications are that the U.S. vehicle fleet will become more efficient and more electrified.  This doesn’t have to be a major technology transformation either.  As my colleague Dave Hurst recently wrote, it could be a simple transmission change.  Stop start vehicles, which simply incorporate more robust batteries and starter systems than in conventional ICEs, can reduce fuel consumption by 5% to 10%, and come with a price tag only slightly higher than today’s ICEs.  Pike Research projects sales of these vehicles to take off in 2012, reaching 25 million globally by 2017.

With fuel consumption going down, the U.S. will likely have to consider alternatives to the current Highway Trust Fund revenue stream.  Earlier reports to Congress have proposed taxes based on vehicle miles travelled or freight-based charges.  In my next blog post, I will explore some of these options, especially the VMT based fees which could capitalize on the increased availability of driver location data from GPS and smartphones.

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