Mar 25, 2022

Back to the Future or Back to the Past? The Implications of Revisiting the Gas Tax

Rosolino A. Candela Program Director, Academic and Student Programs, KellyJune Stout MA Fellow

Sitting in the DeLorean in the film “Back to the Future,” Dr. Emmett Brown tells Marty McFly, “Where we're going, we don't need roads.” Until we all have vehicles with flux capacitors, we do in fact need roads for vehicle travel. U.S. roads are typically funded by a fixed-rate tax on gasoline, charged, as we all know, by the gallon. As more environmentally friendly, fuel-efficient vehicles and electric vehicles flood the market, new gasoline vehicles are slowly being pushed out. The once-useful gas tax is now failing to fund our roads and unfairly burdens lower-income taxpayers who cannot afford electric vehicles.

Economists debate whether the gas tax is an excise user fee or a Pigouvian tax. As an excise user fee, it equates to a fee for driving on roads maintained by the federal government. As a Pigouvian tax, it’s a charge for negative externalities produced by driving a gas-operated vehicle. The gas tax has taken a more Pigouvian turn with electric vehicles escaping it, leaving the burden on pollution-emitting gas vehicles. The increase in online shopping and delivery services also point to a Pigouvian tax, since those who benefit from road travel are no longer necessarily the ones traveling the roads.

The gas tax, and its occasional increases, fund the Highway Trust Fund (HTF), a government program that manages national infrastructure projects, roads, and highway maintenance. In 2008, as electric vehicle purchases were increasing in response to high gas prices, the HTF reported its first deficit. It continues to be underfunded by the gas tax and relies on congressional support.

The Biden administration pushed through an infrastructure bill to remedy the problem of aging roads and deteriorating bridges with a one-time influx of taxpayer dollars. The law is silent on how to fund future depreciation, commonly known as wear and tear or deterioration, which continues to be the responsibility of an underfunded HTF.

So, to the extent that more public financing and provision of infrastructure is justified, the federal push for electric vehicles and corresponding decrease in gasoline consumption will only introduce a corresponding government failure to finance road maintenance.

Congress has heard compelling arguments recommending inflation adjustments to the gas tax or overall replacement with a vehicle mileage tax. However, the gas tax’s regressivity—its disproportionate effect on people of lesser means—fuels concern that an increase would exacerbate the disparity. Meanwhile, the complications that come with enforcing a vehicle mileage tax stall a gas tax replacement. The current gas tax, which hasn’t increased since 1993, is $0.183 per gallon. It will hit a cliff on September 30 and fall to $0.043.

Instead of any complicated gas tax reform discussions, a “gas tax holiday” bill has recently been introduced to Congress. This would eliminate the federal gas tax for the remainder of 2022. If passed, the HTF would temporarily go from underfunded to not funded, increasing the need for a congressional stopgap.

Perhaps the idea of a gas tax holiday will instead refocus Congress on how to pull in money for the roads on which vehicles travel, rather than on spending tax dollars to transition the vehicle pool from gasoline to electric. But given the government’s investment in the research and development of alternative fuel technology, and with the electric vehicle now well-developed, it would not be surprising if policymakers choose to double down on accelerating electric vehicle circulation throughout the U.S. market.

The vehicle pool transformation push started in the Obama administration and continues today with paternal environmental and financial nudges. In particular, the federal government offers federal tax credits and exclusion from the gas tax as incentives for electric vehicle purchases.

However, a 2019 Congressional Research Service report found that electric vehicles are disproportionately purchased by relatively wealthy taxpayers with an annual salary over $100,000. The federal tax credit is more enticing to wealthy taxpayers willing and able to pay for a new electric vehicle that has a sticker price around $10,000 more than a new gas vehicle.

That leaves us in a situation where wealthy electric vehicle owners enjoy federal tax credits, gas tax avoidance, and the bonus of front-row "fuel-efficient" parking, while the used vehicle industry recirculates less-efficient gasoline vehicles back into the market and the gas tax burden continues shifting to lower-income consumers. The stalwart effort to decrease pollution has created an unintended consequence of widening the income gap related to vehicle ownership.

The income gap will continue to widen with the federal government's requirement that half the U.S. vehicle market share be electric by 2030. To the extent that policymakers wish to see electric vehicles in every household—and not in just wealthy households—and develop sources other than a Pigouvian gas tax to fund our roads, tax incentives are not the answer.

Moreover, manufacturer-specific tax credits may not result in cheaper electric vehicles. Automobile producers will be incentivized to produce more electric vehicles relative to gasoline-powered automobiles. However, if such manufacturer-specific credits attract entry by new producers, or if they cause incumbent producers to produce more electric vehicles relative to the alternative, this cannot occur without bidding away real resources from the production of gasoline-powered automobiles. The unintended result will be that the credits will eventually be “priced into” the cost of producing electric vehicles, dulling their real effect, while leaving consumers with fewer alternatives.

Our current approach may also generate another unintended consequence: rent-seeking, regulatory capture, and the creation of barriers to entry by incumbent electric vehicle manufacturers who understand that while they can cope with expensive regulation, their fledgling competitors cannot. Technological advances can invoke these behaviors as manufacturers work to recoup the cost of development, but it is likely that if left without government incentives, entrepreneurial activity would eventually make electric vehicles more affordable and mainstream, like cellphones and personal computers have become.

Currently, all vehicle owners are required to pay income tax, which makes tax credits possible and provides for supplemental HTF funding. However, only gas vehicle owners are feeling the pain of the gas tax. The government should not use this pain to manipulate consumers to buy electric vehicles. If neither the gas tax nor federal incentives change—and if we interfere too much with a market which has plenty of motivation to get electric vehicles in more middle- and lower-income garages—then the future will include wealthy elites free riding on roads at the expense of commoners.

In the words of Marty McFly, “That’s Heavy.”

—Rosolino Candela is a senior fellow with the F.A. Hayek Program at the Mercatus Center at George Mason University. Kelly June Stout is a Mercatus M.A. fellow.

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate