The Federal Aid Highway Act of 1956 [1] established a trust fund fed by a new fuel tax that was to be used exclusively for highway construction and maintenance. The rate was originally set at three cents per gallon, but was raised in the Eisenhower, Reagan, H.W. Bush, and Clinton administrations to its current rate of 18.4 cents on gasoline and 24.4 cents on diesel fuel. Along the way, the trust fund was raided to finance things other than highways.
Today about two-thirds of federal fuel taxes are used to fund the maintenance and repair of our nation's roads and bridges. [2] This fuel tax is an excise tax - a tax imposed selectively on the purchase of goods or services. [3] At its core, an excise tax is a consumption tax. Consumption taxes affect people with lower incomes more than those with higher incomes because a bigger part of a smaller income by necessity must be consumed. Taxes on consumption are regressive because they weigh most heavily on poor people.
Even so, consumption taxes have their place. They raise the price of a commodity and thus reduce its demand. This can be a useful public policy when the commodity in question is harmful to society. Taxes on cigarettes and alcohol are good examples, and the fuel tax is another. Excise taxes against these products tend to reduce their consumption, and society at large benefits from less pollution and less dependence on public health services. [4]
Today excise taxes fund less than 4% of the federal budget, but they have not always been so insignificant. Sixty years ago, they accounted for 20% of federal revenues. Why the decline? All taxes are unpopular, but excise taxes face a special political barrier because they are targeted at a particular product or industry. A powerful fossil fuel lobby has prevented any changes in the gas tax for 22years - during which time the value of the dollar has declined by more than 40 percent!
Ideally, the composition of federal tax revenues should have nothing to do with the composition of federal expenditures. Money is fungible - any one dollar can be substituted for any other dollar, whether on the revenue or expense side of the ledger. But when priorities like roads and bridges are funded explicitly by a specific class of revenue - fuel taxes - the priorities are vulnerable to targeted restrictions brought on by political interests. The condition of today's highways reflects the 40% cut in funding brought about by a fuel tax rate frozen in the nineties.
Ideally, funding of highway maintenance should be a small part of a large tax overhaul. Real reform would eliminate all the payroll taxes that suppress wages and create unemployment. Meaningful reform would eliminate all of the capital subsidies embedded in the tax code. True reform would capture economic externalities by application of excise and import taxes. And comprehensive reform would finance the bulk of the federal budget with a modest, uniform, and progressive tax on income of all kinds. [4]
But we live in a world of political realities, so let's consider a plausible and viable mini-reform to address highway maintenance and construction. The goal of our tiny reform will be to recover that 40% of funding lost to inflation over the past 22 years.
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