Today (June 6th) marks the 85th anniversary of The Revenue Act of 1932. The Tax Act was designed to close a significant federal deficit (general fund) gap of just over $1 billion at the time. A component of the 1932 Tax Act was a 1 cent/gallon temporary gas/fuel tax that was scheduled to expire in 1934, this tax is known as the Federal excise tax on gasoline. Initially this excise tax was intended strictly for deficit reduction and not dedicated to building or maintaining infrastructure (roads and bridges).
Like all taxes, the Federal excise tax on gasoline never expired but it expanded. Today the excise tax sits at 18.4 cents/gallon for gasoline and 24.4 cents/gallon for diesel where it has remained steady since 1997 (the Clinton Administration). From it’s origins in 1932 until 1997 the excise tax was split in various percentages between deficit reduction (general fund) and infrastructure (Highway Trust Fund) but in 1997 President Clinton redirected the entire excise tax (100% of it) to the Highway Trust Fund. The Highway Trust Fund takes in about $35 billion a year from the Federal excise tax, which many lawmakers argue is insufficient to the tune of about $15 billion annually for maintaining the Nation’s infrastructure. Many lawmakers, including the normally tax increase adverse GOP, have been calling for increases on this Federal excise tax for many years arguing that it is a consumption tax that pays for the infrastructure which it’s consumers (travelers) are using.
Trump’s Infrastructure Plan: Trump has proposed to spend $1 trillion over 10 years on critical infrastructure spending plan to rebuild the country’s roads, bridges, airports, electric grid and water systems. Washington insiders have pegged the realistic direct federal spending on infrastructure much lower than $1 trillion at a range of $200 – $300 billion dollars, which is still significant. This is no clear pathway for Congress on how they would find the lower number of $300 billion in new money to pay for this plan. With funding details for this plan currently about as clear as mud, the one thing for certain is that consumers can expect to pay significantly more at the pump in terms of Federal excise tax.
If just $300 billion of new infrastructure spending is approved over 10 years, it would translate to the Federal excise tax on gasoline increasing by 15.77 cents/gallon to 34.17 cents/gallon assuming consumers had to foot the entire bill.
Some of the obvious benefits of the proposed increased in infrastructure spending include: fixing a crumbling infrastructure that is badly in need of repair, lower vehicle repair costs to drivers caused by poorly maintained roadways, a safer transportation system, more jobs and less pollution emissions given that the higher cost of driving will reduce the amount of driving that takes place.
The big downside of the increased infrastructure spending is the additional pain at the pump for consumers and truck drivers. As most drivers know, the Federal excise tax isn’t the only tax that they pay at the pump. Drivers also pay State & Local gas taxes that vary from 12.25 cent/gallon in Alaska to 58.20 cents/gallon in Pennsylvania (30.64 and 76.60 cents respectably with the Federal excise tax included). The table above illustrates the State gas tax rates per gallon ranked from highest to lowest.
An increase in the Federal excise tax of 15.77 cents to cover the $300 billion in new infrastructure spending would translate into a 20 – 50% tax increase at the pump. In real dollars the increased tax equates to an additional $165 per year / per car that consumes 20 gallons per week.
If for some reason the entire $1 trillion in infrastructure spending was approved and passed onto consumers at the pump, which is highly unlikely, then it would translate into an increase in the Federal excise tax of nearly 50 cents per gallon representing a 65 – 163% tax increase at the pump with out of pocket cost to consumers increasing in excess of $500 per year / per car that consumes 20 gallons per week.
The silver lining in this $1 trillion cloud is that the increased tax would probably put the U.S. into compliance with the Paris Climate Agreement by significantly reducing the number of cars on the road and thereby reducing our emissions.
So the question is do we root for higher Federal excise taxes given that the societal benefit seem to be substantial while on the other side of the ledger the penalties for low-wage earners would be potentially devastating?