Trucks at Work

Hike fuel taxes here, cut other taxes there

Increasingly these days when talk turns to the future of the U.S. surface transportation system, the discussion always seems to get log-jammed on a single subject: Money, or rather, the lack of it.

As things stand right now, the surface transportation system’s bank account – better known as the highway trust fund (HTF) – is expected to run dry sometime in May this year. That’s because, in the eyes of many experts, the fuel taxes feeding into the HTF aren’t keeping up with expenses – largely since fuel taxes haven’t been increased in over 20 years and aren’t indexed to inflation.

Now, many folks rightly take issue with this “funding shortfall” scenario, especially as some believe we might be overpaying quite significantly for our transportation needs.

In the short term, however, a large and perennial funding issue needs to be solved. And while many might not like fuel taxes, some groups – especially the nonpartisan Tax Foundation – think they’re the “least-bad” option out there.

“If lawmakers decide to look for revenue instead of cutting [HTF] spending, their source of revenue should be long-term and should connect drivers as closely to the cost of funding the roads as possible,” noted Kyle Pomerleau, the group’s economist in a statement.

“One option is to increase the gas tax, adjust it to inflation, and offset that increase by reducing another tax by the same amount of revenue,” he noted.

To that end, the Tax Foundation put together a new report – dubbed Options to Fix the Highway Trust Fund – to show how such an “offset deal” could be worked out.

So here’s the starting point: Increased spending and the erosion of fuel tax income – due to less vehicle miles traveled (VMT) and increases in fuel efficiency – left the HTF facing ongoing deficits, estimated to grow into a $168 billion shortfall over the next decade. Unless something is done to fix it, Pomerleau said, the trust fund will run dry by mid-2015.

One of the simplest options to fix this issue in the Tax Foundation’s view is to increase federal fuel taxes, adjust it to inflation, and offset that increase by reducing another tax by the same amount of revenue.

“Unlike some other taxes, the gas tax is relatively less distortive. It doesn’t significantly impact economy or reduce the incentive to invest,” Pomerleau stressed. “By lowering more distortive taxes, such as the capital gains tax, and raising the same amount of revenue from non-distortive taxes, not only would the HTF have enough revenue, but the economy would grow as a result.”

So here are the numbers. The Tax Foundation figures federal fuel taxes will need to be hiked high enough to generate $15 billion to $17 billion annually, offsetting that cost with a tax cut somewhere. That means the federal fuel tax would jump to 28 cents per gallon and be adjusted for inflation from here on out.

To offset that hike, five possible tax cut options:

  • A 2 percentage point decrease in the capital gains tax rate.
  • A 2 percentage point decrease in the top marginal income tax rate.
  • A $1,000 increase in the standard deduction.
  • A 1 percentage point decrease in the bottom marginal income tax rate.
  • An expansion of the Earned Income Tax Credit.

Each of those tax cuts results in an approximately $15 billion tax cut in the first year, Pomerleau said.

“Our model reveals a number of tradeoffs in this swap,” he added. “If Congress would like to make this change pro-growth, one option would be to lower the capital gains tax rate. If Congress would like to address distributional concerns with the gas tax but aren’t concerned with economic growth, an option would be to expand the earned income tax credit. If Congress would like to maintain neutral distribution and growth while fixing the trust fund, one option would be to expand the standard deduction.”

Will Congress bite any of those “offset” options? We’ll have to wait and see.

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