TPB News

Indexing Gas Taxes to Inflation Holds Greatest Promise for Raising Transportation Revenue in Short-Term, Study Concludes

Jan 23, 2012

Indexing gas taxes to inflation would be the easiest way to secure more adequate funding for the maintenance and expansion of the region's transportation system in the short-term, according to a study prepared for the TPB. But the study adds that, in the long-run, transportation funding should be tied to how much drivers use the roads, not to how much gasoline they buy.

Cambridge Systematics, the firm hired to conduct the study, included the findings in a comprehensive financial analysis of available revenues and planned expenditures for transportation in the Washington region over the next 30 years. The study was conducted for the TPB as part of its 2010 update to the region's long-range plan for transportation.

While the analysis identified nearly $223 billion in revenues that are "reasonably expected to be available" for transportation through 2040, it said that both short-term and long-term revenue increases are necessary in order to keep up with a growing population and the rising costs of constructing and maintaining the region's transportation infrastructure.

In the short-term, the analysis found, Federal and state taxes on motor fuel will remain a viable base for funding, as they are simple to collect and because major gains in fuel efficiency across the entire fleet of cars and trucks -- which would diminish the revenue yield of motor fuel taxes -- are still several years away.

But, because the Federal gas tax and state gas taxes in the Washington region are not tied to inflation, their purchasing power will continue to erode with time.

The Federal gas tax, for example, is 18.4 cents per gallon and hasn't been raised since 1993. Today, the per-gallon tax purchases one-third less than it did 19 years ago.

In Maryland, the state tax on motor fuel is 23.5 cents and was last raised in 1992. Virginia's 17.5-cent-per-gallon tax hasn't been raised since 1986. The District of Columbia is the one exception in the region, having raised its motor fuel tax to 23.5 cents in 2009.

Tying these taxes to inflation is, conceptually, the simplest short-term option for raising additional revenue, the report states. "Indexing current Federal and state motor fuel taxes to inflation is the most promising immediate step to assure that adequate funding continues to flow to our highway and transit systems in the next two to five years."

In the long-term, however, more comprehensive solutions are needed. "New financing mechanisms are important in view of the anticipated shift away from petroleum-based fuels," the report explains. "Broad-based user fees that are not dependent on fuel consumption but on the use of the system, e.g., mileage-based or VMT fees" will become necessary, it says.

The report lists 30 specific potential sources of increased revenue, including changes to existing fuel taxes and vehicle registration fees and creating new tolling or pricing systems on area roadways. Most of the measures would collect revenue from system users, while some would use special financing techniques to leverage outside investments.

The potential yield, stability, equity, and political acceptability of these potential revenues sources are also detailed in the analysis. For example, the report states that charging drivers new mileage-based fees sends a stronger pricing signal to drivers than do motor fuel taxes, but that they require much higher administrative and compliance costs. Raising vehicle registration fees, on the other hand, are relatively inexpensive to administer but don't charge drivers based on how much they use the roads.

Even the best solutions will face a unique obstacle in the Washington region, however. "The greatest challenge [here] is the existence of multiple jurisdictions at several levels, each with its own tax base, tax structure, and tax policy," the analysis warns.

While no "right answer" for the long-term emerges from the report, the analysis is clear that tying current motor fuel taxes to inflation makes the most sense in the short-term, as it is administratively inexpensive to collect and will remain a viable revenue source for several more years. The long-term is more complicated, but a range of options (and associated trade-offs) remain available for decision-makers and policy-makers to weigh in figuring out how best to secure adequate funding for maintaining and growing the region's transportation system.

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