Last week, Republican Presidential candidate and former Governor Nikki Haley (R-SC) released an economic plan that would eliminate the federal excise taxes on gas and diesel. Her goal is to “help families struggling with record high gas prices.” A laudable goal, but it would be poor policy.
Under current law, the federal government levies a $0.184 per gallon excise tax on gasoline and a $0.244 per gallon excise tax on diesel fuel. The revenue from these taxes help finance the federal Highway Trust fund (HTF), which the federal government uses to fund transportation projects throughout the nation. States also levy taxes on gasoline and diesel, typically at much higher rates than the federal government.
Eliminating the gas and diesel tax would be unfair. Gas and diesel taxes are classic “user charges:” taxes or fees that individuals or businesses pay related to a benefit they receive from the government. The purchase of gasoline and diesel roughly corresponds to the use of roads and highways. Eliminating these taxes and replacing them with general funds would shift the cost of road and highway spending onto all taxpayers, regardless of road use.
Breaking the link between taxes paid and the use of roads would also have negative efficiency consequences. The gas tax and diesel tax act as prices for road use. If lawmakers eliminate these taxes, the price of driving would fall, leading to more cars and trucks using the same roads. Increased driving would increase the externalities related to driving such as congestion and pollution.
If anything, the federal excise taxes on gas and diesel should be increased. Both taxes have been levied at the same rate per gallon since 1993. As the price level and the cost of road repairs have increased, the real value of these taxes have declined by 51 percent. For the past decade, the HTF has been running a persistent deficit, requiring Congress to regularly transfer money from the general fund.
It is true that the gas tax is not viable in the long term. Electric vehicles are becoming more popular and internal combustion vehicles are becoming more fuel efficient. As a result, individuals can drive at a lower cost than in the past. Eventually, the gas tax should be replaced by a mileage-based fee, which would apply to vehicle road use regardless of a vehicle’s fuel efficiency. In the short term, however, the gas tax should remain an important financing mechanism for the highway trust fund.
Nikki Haley should find alternative ways to provide relief to middle-income households.