Institute of Transportation Studies at UC Berkeley

Inflation and increased fuel economy have reduced the buying power of the revenues collected from state and federal motor fuel taxes. Because fuel taxes are almost always collected on a per-gallon basis, in most states they must be raised by specific acts of the legislature and it is becoming increasingly difficult to find the political support necessary to raise them. A number of states have experimented with fuel taxes that adjust automatically by being indexed to the price of gasoline, to the consumer price index, or to some indicator of highway construction and maintenance costs. This paper reviews experience with indexed motor fuel taxes in the United States, and finds that in many cases indexed taxes have failed to produce the anticipated results because declines in fuel prices often cause declines in indexed fuel taxes. Indexing gas tax rates to the Consumer Price Index appears to be the best way of insuring that fuel tax revenues keep pace with inflation. Fuel taxes are the mainstay of transportation finance in the United States. The federal government and every state levy taxes on gasoline and diesel fuel. Motor fuel taxes have much to recommend them fiscally, politically, and administratively. First and foremost, as a "user fee" this tax is widely regarded to be inherently fair. It can be assumed that we benefit from the transportation system in proportion to the extent to which we use it, and motor fuel taxes charge us roughly in proportion to our use of the road and highway system. Furthermore, the tax is paid by motorists in small increments and is relatively hidden in the sales price of motor fuel. This has tended to minimize organized public opposition to it. The tax is also easy to administer and collect from both the taxpayer's and the government's point of view. The motor fuel tax is usually collected from fuel distributors rather than from retailers or consumers. This minimizes opportunities for evasion and reduces the cost of collection to an historical average of one-half of one percent of tax proceeds. By contrast, prior to the advent of electronic toll collection, highway tolls could often involve collection and administrative costs that amounted to as much as twenty percent of the proceeds. As motor fuel consumption has soared over the past eight decades, so have tax proceeds, enabling users of the nation's highway system to finance its construction and maintenance.