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 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Revenues 32.5 46.5 47.4 48.1 48.7 49.3 49.8 50.1 50.4 50.6 223.2 473.6

Source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2017.

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 48 cents per gallon of gasoline and about 54 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 2017 and the most recent year for which data for that price index were available. According to estimates by the staff of the Joint Committee on Taxation, the option would increase federal revenues by $474 billion between 2017 and 2026. (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 when users of highway infrastructure are charged according to the marginal (or incremental) costs of their use—including the “external costs” that such use imposes on society—economic efficiency is promoted. 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 those associated with pollution, climate change, and dependence on foreign oil, are directly related to the amount of motor fuel consumed. However, the larger fraction of such costs is related to the number of miles that vehicles travel, the road congestion that arises when people drive 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 rises.) 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. If drivers paid no other taxes, then setting taxes on motor fuels so that they equaled external costs would be economically efficient. Even after accounting for the ways in which taxes on motor fuels would compound the costs associated with current taxes on individual and corporate income, excise tax rates on motor fuels would probably have to be substantially higher than the current rates for taxes to cover the costs that drivers impose on society. With a higher tax on fuel, people would drive less or purchase vehicles that use 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 on 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 more direct 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 proportionally 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 households and in households—typically situated in rural areas—at some distance from most manufacturers.

An alternative approach would restore the purchasing power that the excise taxes on gasoline and diesel fuel had in 1993—the last time those two taxes were increased—plus an adjustment to include the effects of inflation since that time. Under that approach, the taxes on gasoline and diesel fuel would be increased, respectively, by 12 cents and 16 cents per gallon. Combined with the $70 billion in transfers (mostly from the general fund of the Treasury) provided in the Fixing America’s Surface Transportation Act of 2015 (FAST Act), the increased taxes would allow the trust fund to meet obligations provided for under the FAST Act as well as the obligations that would occur from 2020 to 2026 if the obligation levels (as adjusted for projected inflation) in that act were continued.