A gas tax hike is worth considering

A gas tax hike is worth considering
© Greg Nash

President TrumpDonald John TrumpTrump: 'I will not let Iran have nuclear weapons' Rocket attack hits Baghdad's Green Zone amid escalating tensions: reports Buttigieg on Trump tweets: 'I don't care' MORE has shown a willingness to increase the U.S. gas tax by 25 cents to fund new infrastructure spending, according to recent reports. The current federal gas tax is 18.4 cents per gallon, and including state and local taxes brings the total to 49.4 cents per gallon.

By some estimates, gas and diesel taxes account for more than 90 percent of all U.S. revenues from environmental taxes, defined as those levied on specific physical products with proven negative environmental externalities. In general, an optimal environmental tax should be set to match the marginal external damage caused by the pollutant.

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In the case of gasoline, the marginal external costs include the effects of pollution and climate change, as well as road congestion, noise, accidents and pavement damage. According to economists Ian Parry and Kenneth Small, the efficient tax for these externalities would be approximately $1 per gallon.

Other economists recommend higher levels, at $1.55 per gallon. Although a gas tax set too high would be inefficient, a 25-cent increase in the federal gasoline tax would remain safely below the optimal tax rate for the United States and far below typical gas tax rates in other countries in the Organization for Economic Cooperation and Development.

A frequently voiced objection to hiking the gas tax is its regressivity. Because expenditures on gasoline are a larger fraction of a family’s budget at the lower end of the income distribution than at the top, a gas tax will hurt poorer families more than it will hurt higher income families. This problem is not unique to gas taxes, as the regressivity of environmental taxes, including carbon taxes, is well documented.

However, abandoning environmental taxes is not the solution, because environmental taxes have broader objectives than simply raising revenue. A 1997 National Tax Journal paper found that a simple compensation scheme targeting the poorest households could feasibly protect them from the hardship of a gas tax while still increasing net revenue and providing efficiency benefits. A 2012 Brookings Institution study suggests that using only a small fraction of revenues to offset the burden on the bottom two deciles would reduce or eliminate the regressivity of a carbon tax while leaving enough revenue to meet other needs.

Although a gas tax is regressive, a simple back-of-the-envelope calculation suggests that the costs to average households are relatively small. According to the Energy Information Administration, Americans spent about $311 billion on 143 billion gallons of motor gasoline for transportation in 2016, at an average cost of $2.17 per gallon. If the gas tax is fully passed through to higher prices, a 25-cent increase in the gas tax would increase the price of gasoline by 11.5 percent. Given this increase, we can use the Consumer Expenditure Survey to calculate the average increase in gasoline expenditures per household.

By our calculations, households in the lowest income quintile, or bottom 20 percent, would spend an additional $103 on gasoline annually, and the highest quintile would spend an additional $333. This amounts to less than 1 percent of income for the bottom quintile and less than 0.2 percent of income for the top quintile. Even when the secondary effect of higher prices for other goods is included, the burden of the gas tax relative to income is small or negligible.

Another common argument against environmental taxes is that the regional effects are worse for states that are more dependent on fossil fuel production. Americans for Prosperity and Freedom Partners have estimated that the average burden per household of a 2-cent gas tax hike would range from $104 in the District of Columbia to $391 in Mississippi.

However, the average tax burden by state is not meaningful per se because it does not show the variation in burden for high and low income households. Our analysis using household level data from the Consumer Expenditure Survey shows that the proposed gas tax hike would represent less than 1 percent of income for low-income households and less than 0.5 percent of their total consumption. It is an even smaller fraction for high-income households.

In general, a gas tax hike is worth considering. It would help us meet environmental goals and reduce traffic congestion, and the revenue could be used to fund infrastructure spending. To address concerns about politicians misusing the funds, revenues from a gas tax could be earmarked for specific projects and types of expenditures to ensure that they are not diverted to other, less efficient uses.

And if we can resolve these issues with a gas tax, why not go one step further and consider a carbon tax?

Aparna Mathur is a resident scholar in economic policy studies at the American Enterprise Institute. Follow her on Twitter @AparnaMath.

Cody Kallen is a research associate at the American Enterprise Institute.