Some leaders in
Congress want to increase the federal tax on gasoline by 5.45 cents
per gallon, for the first year, and then index it to inflation.
They would use the revenue from this tax increase to finance
additional spending on highways and other transportation projects,
which they say will benefit the economy. Macroeconomic analysis
performed by the Center for Data Analysis at the Heritage
Foundation, however, shows that increasing the gas tax would
depress economic activity and the incomes of millions of Americans.
It would also raise significantly less revenue than its proponents
project. The President should be commended for his firm stand
against raising the federal gasoline tax, and Congress would do
well to abandon proposals to increase the gas tax and instead focus
on spending highway dollars more efficiently, ideally by turning
them back to the states.
The Real Cost of the Gas Tax
Analysts in the
Center for Data Analysis (CDA) estimated the economic and fiscal
effects of a higher gas tax using a well-known econometric model of
the U.S. economy.
The model allows analysts to vary the gas tax and simulate the
effects of higher spending on infrastructure construction, if
adequate details about that construction are available. Because
such details were not available, CDA analysts instead used the
additional revenues from the higher gas tax to pay down national
debt, which is an alternative way of infusing government spending
into a segment of the economy that is tightly aligned with
analysis found that:
- Personal savings
would average $8 billion less per year from 2005 to 2014.
- $82 billion of
the $131 billion increase in federal revenues over 10 years would
be financed out of foregone or lower personal savings.
- Gross Domestic
Product would decline by $6.5 billion per year, in real terms, from
2005 to 2014. In other words, this $131 billion in government
revenues would shrink the economy by $65.5 billion.
- There would be,
on average, 37,000 fewer job opportunities each year. That works
out to one lost job for every $351,000 in new taxes, which is equal
to 11 years of work at average yearly wages.
- Total federal
revenues would fall short of gas tax proponent's projections by
- Family disposable
income would be, on average, $2.5 billion less per year, in real
terms. That's equivalent to the cost of sending 532,600 students to
college each year.
Congressman Don Young
(R-AK) proposed an increase of the federal gas tax from 18.4 cents
per gallon to 23.85 cents per gallon in the first year as part of
the 2004 highway bill. While this twenty-nine percent tax increase
has not generated major support, Congress should not bring the gas
tax increase back as a policy proposal. While raising the gas tax
would increase government revenues, it would only do so at the
expense of economic growth, jobs, and family income.
Some of these
negative effects are due to Americans' mobility needs. Academic
research on the relationship between the gasoline tax and demand
for gasoline indicates that gasoline consumption would not decrease
significantly in the short run if the tax were increased. For every one percent
increase in the gasoline price, usage would decline by .26 percent
in the short run and .86 percent in the long run. In other words,
consumers are willing to make other sacrifices instead of driving
less. On average, an increased gas tax would cost families who
drive $54 per year, which would come out of savings and consumer
shows how much more consumers in each state would
pay for gasoline if Congress were to increase the gasoline tax as
CDA Analysts used
the Global Insight, Inc. (GII) macroeconomic forecasting model to
identify, the economic and fiscal effects of the potential gas tax
hike by increasing only the federal gas tax variable in the model.
The federal gas tax was increased by 5.45 cents in the GII model
for calendar year 2005, and was indexed to inflation for the next
five years. The model showed that many key economic indicators,
including savings, disposable income, and GDP, would experience
slower growth due to the tax increase. The decline in nominal
private savings would total over $82 billion between 2005-2014.
This means that the average American family would save $100 less
each year because of higher gas prices.
Instead of raising
revenue for additional spending-which would negatively affect all
levels of the economy-Congress should make current transportation
spending more efficient. By eliminating wasteful programs and
streamlining other transportation projects such as Amtrak, Congress
could make better use of the taxpayers' money and free up funds for
new projects that it deems essential. Another option would be to
use temporary tolls on federal highways to pay for specific
projects. The best option, though, would be for Congress to "turn
back" highway maintenance and funding to the states, which are
better placed to assess local transportation needs.