For 25 years the United States federal fuel user fee (aka the “gas tax”) has remained stagnant, even as vehicle miles traveled accelerated and crumbling transportation infrastructure needs accumulated.
But the U.S. Chamber of Commerce’s proposal to raise the gas tax by $0.25 per gallon and President Trump’s support for increasing the gas tax to help pay for his infrastructure plan has restarted contentious debate of the future of U.S. transportation funding. So what impact would this gas tax hike have on the U.S. economy, its fuel use, and its fleet composition?
Energy Innovation evaluated the potential impacts of a gas tax increase on the U.S. economy, total energy demand, and transportation fleet composition using the Energy Policy Simulator (EPS) computer model. The open-source and peer-reviewed EPS uses government data to assess the impacts of dozens of energy-related policies on emissions, costs and savings, and fuel consumption.
Our analysis shows that through 2050, a $0.25 gas tax would generate $840 billion in revenue for the federal government, add 1.2 million additional electric vehicles to U.S. roads, and cut total fuel use by more than 1.3 billion barrels. It is also equivalent to a $29 per ton carbon tax on the transportation sector.
A Gas Tax Hike Would Generate $840 Billion In Revenue Through 2050
The Chamber’s proposal would increase the current $0.18 per gallon gasoline tax five cents per year up to $0.43 per gallon and the $0.24 per gallon diesel tax five cents per year up to $0.49 per gallon. This funding is sorely needed, as the gas tax has lost nearly 40 percent of its value in real terms over the past 25 years as inflation has increased.
The federal trust fund that pays for highways and transit projects through gas tax revenue is projected to run a$138 billion deficit by 2027 unless it slashes funding or finds new sources of revenue. This deficit is made even more acute by Trump’s proposal to authorize $200 billion in new infrastructure improvements without designating where that funding could come from.
A gas tax could provide much of this needed revenue, but doing so will create new direct consumer costs. In past years, consumer costs had prevented any gas tax increase, but several senior Republican Members of Congress seem to support raising the tax, and the American Petroleum Institute may remain neutral rather than opposing it.
Under the Chamber proposal, the tax increase would phase in at $0.05 per year until it reaches $0.25 per gallon. Assuming it starts in 2018, the tax increase would create $39 billion in government revenue per year by 2022, and about $840 billion through 2050. While the Chamber estimates a $0.25 gas tax would raise $394 billion over the next 10 years, our modeling puts this number closer to $303 billion.
The cost of the gas tax to drivers would grow to about $30 billion per year by 2022, with annual costs steadily decreasing over time (with rising gas prices in a business-as-usual scenario, drivers naturally drive less and purchase an increasing number of electric vehicles, discussed below, so a flat tax has falling revenue in later years). It is worth noting a $0.25 tax increase is well within the historical variation in gas prices.
Increased Fuel Costs Could Add 1.2 Million Additional EVs to U.S. Roads
If a $0.25 gas tax hike were instituted, rising gasoline costs would increase consumer interest in EVs. We project this would have the effect of increasing annual EV sales by about 100,000 per year in 2050, resulting in around 1.2 million additional EVs on the road by 2050. Of note, our modeling does not account for barriers to EV adoption, for example charging infrastructure build-out needs or EV availability to consumers.
This dynamic of increasing electrification and decreasing fuel consumption raises an interesting point: In a future where EVs make up a substantial share of the vehicle fleet, a gas tax will face steadily-falling revenue. Policymakers considering a gas tax may also consider how they can raise infrastructure revenue in a future with much less demand for gasoline and diesel.
Total Fuel Consumption Could Decline By More Than 1.3 Billion Barrels
Higher costs and increased vehicle electrification would also reduce annual U.S. gasoline and diesel consumption. Annual gasoline consumption would be reduced by between 30 and 35 million barrels with the full $0.25 tax, saving more than a billion barrels through 2050.
Annual diesel consumption would also be reduced, but by a slighter total of about 10 million barrels, saving about 235 million barrels through 2050.
Is A Gas Tax A Carbon Tax By Another Name?
Interestingly, a $0.25 gas tax is equivalent to a $29 per ton carbon tax on the transportation sector, based on the heat and carbon content of gasoline (this equivalency is slightly different when looking at diesel, dropping the carbon tax down to $25 per ton) and associated transportation emissions. As a general rule of thumb, each dollar of a carbon tax is about the same as $0.01 increase in the gas price.
That price compares to the California-Quebec cap-and-trade system’s record high allowance auction price of $15.06 per ton (set in November 2017) and the Regional Greenhouse Gas Initiative cap-and-trade system’s record high allowance auction price of $7.50 per ton (set in December 2015).
Increasing The Gas Tax Still Isn’t A Policy Panacea
Increasing the gas tax by $0.25 would raise hundreds of billions in revenue to invest in U.S. transportation infrastructure. However, this funding source is likely to shrink over time as the fleet becomes electrified, gasoline and diesel vehicles become more efficient, and gasoline and diesel consumption falls.
One option which has gained traction for policymakers to consider that is transitioning from a fuel tax to a tax on the distance traveled, often referred to as a vehicle-miles-travelled (VMT) tax. The VMT tax is insulated from changing vehicle types (i.e. increased electric vehicles) and from improving vehicle efficiency. It also grows relative to the total amount of travel demand, which is directly tied to infrastructure needs. For these reasons, a VMT tax might be a better option going forward that simply increasing the gas tax.
By Robbie Orvis, Energy Innovation’s Director of Energy Policy Design, and Silvio Marcacci, Energy Innovation’s Communications Director.