Economists: pros, cons to raising the state fuel tax

By Phil Ciciora
Business & Law Editor, U of I News Bureau

CHAMPAIGN — After the precipitous drop in crude oil prices over the past nine months, some policymakers in Illinois have advocated raising the state’s excise tax on gasoline, which has remained unchanged at 19 cents per gallon since 1990.

Although increasing the gas tax might lead to a reduction both in the consumption of fuel and in a few other negative side effects like air pollution, it wouldn’t do much to address two of the biggest problems associated with driving: traffic congestion and traffic accidents, says a policy brief co-written by a team of University of Illinois economists.

Increasing the number of tolls, implementing “surge pricing” on highways during rush hour or taxing the number of miles traveled by vehicles might be a better overall solution, says the paper, which was co-written by Don Fullerton, the Gutgsell Professor of Finance; Julian Reif, a professor of finance and of economics; and Kaveh Nafari, a graduate student at Illinois.

While it may be the easiest fix to implement, as well as a surefire way to increase highway revenue, a higher gasoline tax wouldn’t mitigate the “negative externalities” associated with driving, the economists say.

“A gasoline tax affects the consumption of gasoline, not the driving itself,” said Fullerton, also an associate director of the U. of I.’s Institute of Government and Public Affairs. “Increasing the gas tax might encourage drivers to drive less or switch to more fuel-efficient cars, but the best way to reduce traffic congestion and traffic accidents is to tax driving directly.”

According to the study, the state could levy a tax on the number of miles driven based on annual odometer readings or some other technological means.

“This solution has the added benefit of taxing drivers in exact proportion to their benefits: the more you drive, the more you pay,” said Reif, also a faculty associate at the IGPA.

The state also could increase the number of tolls and the price for driving on tollway roads – or even institute “surge pricing” by varying the price of a toll by location and time of day, with a higher toll during congested rush-hour traffic.

“This would allow tolls to target congestion and traffic accidents more efficiently, and it encourages drivers to use roads when they are less congested,” said Fullerton, who along with Reif is a faculty associate with the Center for Business and Public Policy in the College of Business. “Moreover, the primary advantage of tolls is that they collect taxes from those who benefit the most from using highways.”

Another potential problem with the gasoline tax is that it is a regressive tax, rendering it “not an ideal solution” for policymakers who wish to collect taxes from those most able to pay.

“The gasoline tax is not the most efficient or effective way of taxing those who receive the most benefits from highways,” Fullerton said. “For example, drivers of plug-in hybrids derive the same benefits from the use of highways as drivers of gas-guzzlers, but the former will pay much less in gas taxes simply because they purchase less gas. But perhaps the biggest issue is that the poor spend a larger portion of their income on driving than the rich do. And so the poor would be unduly burdened by increasing the gas tax.”

According to the research, vehicle travel on interstate highways in Illinois increased 25 percent between 1990 and 2012, even though the state’s population only grew by 13 percent and lane miles by 11 percent.

“In short, the societal costs of driving have increased significantly, and, due to inflation, the drivers who are the main culprits of these negative externalities are actually paying less in the way of user fees like tolls and gasoline taxes,” Reif said.

The state of Illinois also has consistently spent more on highways than it has collected in highway-related revenue, Reif noted.

“State gasoline taxes provide only 15 percent of the total funds, which is down from 36 percent in 1994,” Fullerton said. “Since Illinois hasn’t raised the gas tax rate since 1990, revenue from the tax has declined in absolute terms over the past 25 years. That decline has been partially offset by revenue increases for tolls and, in some years, by motor vehicle taxes. But a large gap remains between total user tax revenue and total highway spending, and it has grown substantially in recent years.”

According to the authors, the gap is likely to continue to grow even larger in the future.

“First, real gasoline tax revenue is likely to continue decreasing due to inflation and the improved fuel efficiency of cars,” Reif said. “Second, highway spending will probably increase because the state’s infrastructure is in shambles. The American Society of Civil Engineering’s 2014 report card for Illinois infrastructure says that more than 40 percent of Illinois’ major roads are in ‘poor or mediocre condition’ and concludes that additional long-term funding sources will be required to pay for the repairs.”

Although a vehicle-miles-traveled tax and increased tolls would be quite feasible to implement with current technology, they would likely face significant political pushback from drivers accustomed to “free” roads.

The authors emphasized that, like the gasoline tax, a vehicle-miles-traveled tax and increased tolls would be regressive.

“However, for many drivers, a vehicle-miles-traveled tax would not differ substantially from a gasoline tax,” Fullerton said. “But if policymakers’ primary goal is to collect highway revenue from those with the ability to pay, the state’s best option might be to do nothing about it and use general revenues from the income tax to pay for roads. It all depends on what the endgame is for policymakers.”

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