Increase Excise Taxes on Motor Fuels by 35 Cents and Index for Inflation

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Revenues 30 42 44 45 46 47 48 49 50 51 207 452

Source: Staff of the Joint Committee on Taxation.

Note: This option would take effect in January 2014.

Revenues from federal excise taxes on motor fuels are credited to the Highway Trust Fund to pay for highway construction and maintenance as well as for investment in mass transit. Those taxes currently are set at 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel produced. (State and local excise taxes bring total average tax rates nationwide to about 49 cents per gallon of gasoline and about 55 cents per gallon of diesel fuel.)

This option would increase federal excise taxes on gasoline and diesel fuel by 35 cents per gallon, to 53.4 cents per gallon of gasoline and 59.4 cents per gallon of diesel fuel. In future years, those values would be adjusted to reflect changes in the price index for gross domestic product between 2014 and the most recent year for which data for that price index were available. According to the staff of the Joint Committee on Taxation, the option would increase federal revenues by $452 billion over 10 years. (Because higher excise taxes would raise businesses’ costs, they would reduce the tax base for income and payroll taxes. The estimates shown here reflect reductions in revenues from those sources.)

One rationale for increasing excise taxes on motor fuels is that the rates currently in effect are not sufficient to fully fund the federal government’s spending on highways. A second rationale is that increasing excise taxes on motor fuels would have relatively low collection costs because such taxes are already being collected.

A further rationale for this option is that economic efficiency is promoted when users of highway infrastructure are charged according to the marginal (or incremental) costs of their use, including the “external costs” that are imposed on society. Because current fuel taxes do not cover all of those marginal costs, raising fuel taxes by the amount specified in this option would more accurately reflect the external costs created by the consumption of motor fuel. Some of those costs—including the costs of pollution, climate change, and dependence on foreign oil—are directly associated with the amount of motor fuel consumed. However, the larger fraction of those costs is related to the number of miles that vehicles travel, the road congestion that arises from driving at certain times and in certain locations, noise, accidents, and—primarily because of heavy vehicles—pavement damage. (As vehicles become more fuel efficient, the share of external costs attributable to the number of miles traveled will rise.) Various studies suggest that, in the absence of a tax on the number of vehicle miles traveled or on other factors that generate external costs, the external costs of motor fuels amount to at least $1 per gallon, indicating that for drivers to cover the costs they impose on society, excise tax rates on motor fuels would have to be substantially higher than the current rates. If the cost of fuel was higher, people would drive less or purchase vehicles that used fuel more efficiently, thus reducing some of the external costs; in contrast, paying for highways and mass transit through general revenues provides no incentive for the efficient use of those transportation systems.

An argument against this option is that it would probably be more economically efficient to base a tax on the number of miles that vehicles travel or other measurable factors that generate external costs. For example, imposing tolls or implementing congestion pricing (charging fees for driving at specific times in given areas) would be better ways to alleviate congestion. Similarly, a levy on the number of miles driven could be structured to correspond more closely to the costs of repairing damaged pavement than could a tax on motor fuels. However, creating the systems necessary to administer a tax on the number of vehicle miles traveled would be much more complex than increasing the existing excise taxes on fuels. Moreover, because fuel consumption has some external costs that do not depend on the number of miles traveled, economic efficiency would still require taxes on motor fuels even if other fees were assessed at their efficient levels.

Some other arguments against raising taxes on motor fuels involve issues of fairness. Such taxes impose a proportionately larger burden, as a share of income, on middle- and lower-income households (particularly those not well-served by public transit) than they do on upper-income households. Those taxes also impose a disproportionate burden on rural households because the benefits of reducing vehicle emissions and congestion are greatest in densely populated, mostly urban, areas. Finally, to the extent that the trucking industry passed on the higher cost of fuel to consumers—in the form of higher prices for transported retail goods, for instance—those higher prices would further increase the relative burden on people in low-income and rural households who live some distance from manufacturers.