Personal Finance > Taxes
Gas taxes on the rise
Coming soon to a pump near you: higher gas taxes.
March 11, 2003: 9:39 AM EST
By Gordon T. Anderson, CNN/Money Contributing Writer

NEW YORK (CNN/Money) - The threat of war in Iraq, civil unrest in Venezuela, tight inventory controls by oil companies, alleged price gouging by station owners. It's a perfect storm at the pump, and another wave may be about to crest.

The hapless American consumer is enduring the highest retail gasoline prices in nearly two decades. Retail gas prices are up to a national average of $1.66 a gallon, according to the Department of Energy.

Now, politicians across the nation are trying to raise fuel taxes.

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In Washington, D.C., as well as in more than half the state capitals, there are proposals to increase the levies governments charge on gasoline, diesel, and other automotive fuels. If the plans become law, they could add more than 25 cents a gallon in state and federal taxes, on top of the 40-to-50 cents a gallon most Americans already pay.

The initiatives range from the quixotic to the inevitable. But the breadth of activity indicates a tax-raising trend.

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At the federal level, Rep. Don Young (R-Alaska), chairman of the House Transportation and Infrastructure Committee, is spearheading a drive to nearly double the federal gas tax. He wants to phase in a series of annual increases that would raise the feds' take from the current 18.4 cents per gallon to more than 33 cents by 2009.

In state houses, a combination of bloated state spending and recession-ravaged tax bases has legislators in both parties scrambling for new sources of income. For many, the tiny-yet-pervasive gas tax is a tempting target, because it seems painless relative to more visible items like state taxes on income or property. Here is some recent activity:

  • In Ohio, Republican governor Bob Taft who during his re-election campaign mocked his opponent as "Taxin' Tim" Hagen -- has proposed a 6-cent increase.
  • In Indiana, where a 3-cent increase went into effect on January 1, legislators are already talking about another hike.
  • In fiscally turbulent California, gasoline taxes are on the agenda in Sacramento, as well as within regional authorities in northern and southern parts of the state.
  • In Washington state, voters last year rejected a referendum that would have increased gas taxes by 9 cents a gallon. Now, Republican legislators and Democratic governor Gary Locke are trying to push through a 5-cent increase.
  • In Maryland, newly elected Republican governor Robert Ehrlich who ran on a pledge to oppose any broadening of the state sales tax began publicly considering a gasoline tax increase even before his inauguration.

In all, at least 26 states are pondering increasing fuel taxes, according to the American Automobile Association (AAA). That is in addition to the five states where hikes passed in 2002.

To be sure, most of the proposals are in the planning stages. An actual bill has passed only in Wyoming, and one has been explicitly voted down only in Virginia. Still, expect more attention to be paid to the issue in coming months.

What's the money for?

At the federal level, gasoline taxes pay entirely for transportation needs: maintenance and improvements of highways, as well as for mass transit. Most states also devote their fuel-tax revenue to transportation programs. Proponents of increases argue that only money can fix America's crumbling infrastructure, and fuel taxes are a necessary evil.

The U.S. Department of Transportation estimates that by 2009, annual maintenance and "necessary" upgrades of the nation's highway will cost $61.2 billion, with mass transit needs at $12.4 billion. Last year, the federal government spent $31.8 billion and $7.5 billion, respectively, on those items.

"Just based on the DOT projections, we have to come up with revenue sources to almost double the amount of money we spend," said Steve Jensen, a spokesman for the House Transportation Committee. The task is made more difficult by the fact that federal gas-tax revenue is actually declining these days, thanks to more fuel-efficient cars and a recession-related decline in the number of miles people are driving.

"On one hand, nobody wants to raise taxes," says William Beuchner, chief economist at the American Road and Transport Builders Association, a construction industry lobbying group. "But there are a lot of big problems that need to be addressed, so politicians are between a rock and a hard place. If they want to fix things, the money has to come from somewhere."

A billion here, a billion there . . .

With most of the new legislation, "the increases are small -- pennies, in most cases," says Rayola Dougher, Senior Policy Analyst at the American Petroleum Institute. Apparently, the logic is that the size of such plans won't cause much pain.

"It's not the same kind of 'Bam! It hits you' item like an increase in property taxes or the income tax," acknowledges AAA's Justin McNaull. "But for somebody who uses a lot of gas, it's not pocket change, either."

Economist Buechner estimates that for every one-cent increase in fuel taxes, the typical U.S. family will pay an extra $25 per year. So if total federal and state gas taxes go up by a dime, your out-of-pocket expenses rise about $250. Currently, the average family pays about $660 a year in fuel taxes, according to the American Petroleum Institute.

The numbers get huge in the aggregate. Americans drive some 4.3 trillion miles per year, according to the National Transportation Safety Board. An average fuel-efficiency of 20 miles per gallon would amount to some 215 billion gallons of gas is used to cover those miles. Even just five cents more a gallon adds up to a $10.75 billion tax increase.

The biggest worry, however, is not in any individual hike, but in the chance that state taxes will climb steadily and federal gas taxes rise in tandem.

Connecticut, for example, already has one of the nation's highest state taxes on gasoline, at 25 cents per gallon. Legislators there have publicly discussed raising that to 40 cents per gallon by 2007. If the federal effort were also successful, drivers in the Nutmeg State could be paying as much as 73 cents a gallon in taxes by the end of the decade.

Moreover, an increasing number of legislatures are exploring ways to automate the process of increasing gas taxes in the future. Seven states already employ mechanisms that tie the level of gas taxes to some variable -- from the Consumer Price Index to the amount of money in state budget coffers -- which triggers an increase without any new vote in the legislature.  Top of page

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