Over the past five years, 26 states have increased their gasoline tax rates, and many more are considering similar hikes.
In Wisconsin, newly elected Gov. Tony Evers recently introduced his state budget proposal, which includes a provision to hike the state fuel tax and increase fees on licensing and registration. Wisconsin’s current gas tax is set at 30.9 cents per gallon, or 32.9 cents when all state taxes are included. Evers’ proposal would increase the state gas tax by 8 cents per gallon, bringing the state tax imposed to 40.9 cents per gallon.
In a Maryland Public Policy Institute study, Wendell Cox and Ronald Utt argue gas taxes have a significantly greater detrimental effect on lower- and middle-income families than they do on the wealthy, and Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional spendable income per month for an average family.
Even worse, a tax hike would raise prices on goods and services throughout the economy, because virtually all consumer goods are transported using gasoline-powered vehicles. In fact, about 70 percent of all freight transported annually in the United States—accounting for manufactured and retail goods worth $671 billion—is transported by truck, according to Truckinfo.net. Businesses will simply pass these added costs on to consumers.
In addition to the 8-cents-per-gallon increase, Evers’ plan would revive gas tax indexing, which would increase the state gas tax automatically to keep up with inflation. Gas tax indexing used to exist in Wisconsin, but it was repealed in 2005.
Tying any tax rate to a certain commodity price or the Consumer Price Index is problematic and makes politicians and regulators less accountable for tax changes. Additionally, it often contributes to higher prices by placing upward pressure on the very measures used to determine the rate.
In an attempt to offset some of the effects of the gas tax hike, Evers’ proposal would end the minimum markup law for gasoline purchases. Dating back to the Great Depression, the minimum markup law, also known as the Unfair Sales Act, limits the ability of Wisconsin companies to charge reduced prices. Implemented in 1939, the law prohibits businesses from selling products below cost. Only 16 states have minimum markup laws still on the books.
Competition breeds innovation and better products and services for consumers. Wisconsin’s minimum markup law hinders competition while subsidizing existing companies. While increasing the gas tax may be the wrong path to fund transportation projects, the legislature should continue to pursue reforms that would phase out this outdated, disruptive policy.
In addition to the fuel tax increase, the tax hike proposal includes several new “fees,” better described as “taxes,” including increased taxes on heavy trucks, hybrid vehicles, and vehicle titles. Under the legislation, fees on heavy trucks would increase by 27 percent, a previously established fee of $100 for electric vehicles and $75 for hybrid vehicles would be enforced, and vehicle title fees would be increased by $10. The Evers administration estimates the new taxes and fees would generate more than $600 million over the two-year budget.
Adding the new fees, which are a clear example of nickel and diming by the state, to an increased gas tax, would place an increased burden on already cash-strapped Wisconsin drivers. The heavy truck fee places an additional burden on the transport of goods, which will only serve to drive up prices further.
It is imperative for Wisconsin lawmakers who are considering a gas tax increase to analyze how existing funds are being used. For years, Wisconsin legislators have misspent transportation money. In a 2017 analysis, the MacIver Institute found Wisconsin wasted more than $2 billion in transportation spending. MacIver found major problems with the state’s bidding process. For instance, had the Wisconsin Department of Transportation (WDOT) received even one additional bid for each of its 363 construction contracts from January 2006 to December 2015, WDOT would have saved $4.5 million per year.
Wisconsin legislators need to explore more modern and efficient ways to fund road construction and traffic infrastructure, such as privatizing roads and establishing toll systems. In several cities, transportation agencies are using congestion pricing—varying toll prices based on congestion—to manage demand and limit traffic problems.
The following documents provide additional information about how motor-fuel taxes are applied and the impact they have on states’ economies.
Dispelling the Myths: Toll and Fuel Tax Collection Costs in the 21st Century
In this Reason Foundation Policy Study, Daryl S. Fleming examines all-electronic tolling, its basic operations plan and business model, the principal factors affecting toll collection costs, and a number of reforms states can make to reduce the cost of toll collection.
State Motor Fuel Taxes
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel).
23rd Annual Highway Report on the Performance of State Highway Systems
In this report, the Reason Foundation ranks the performance of state highway systems in 11 categories, including spending per mile, pavement conditions, deficient bridges, traffic congestion, and fatality rates.
Alternatives to the Motor Fuel Tax
This report, prepared by the Center for Urban Studies at Portland State University and submitted to the Oregon Department of Transportation, evaluates potential alternatives to motor-fuel taxes. The report also identifies the economic and technological problems that must be addressed when designing alternative revenue sources.
It’s Time to Allow Tolling on All Federal-Aid Highways
In this article from the Reason Foundation, William Newman argues that the diminishing returns of gas taxes make it necessary to allow states to establish tolls to help pay for the construction, repair, and maintenance of new and existing highways.
Designing Alternatives to State Motor Fuel Taxes
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes in world in which more fuel-efficient vehicles are rapidly becoming available. They also report on the economic effects of road pricing as a substitute for fuel taxes.
Paying at the Pump: Gasoline Taxes in America
In this paper from the Tax Foundation, Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation projects.
Research & Commentary: Congestion Traffic Pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under a congestion pricing model, road operators charge a variable price based on congestion, thereby managing demand and limiting congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.
Raising Gas Taxes Won’t Fix Our Bridges
In the aftermath of the I-35 bridge collapse in Minneapolis, Minnesota, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. Moore wrote, “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lindsey Stroud, a state government relations manager at The Heartland Institute, at [email protected] or 757/354-8170.