Rising prices fuel discussions over the future of the federal gas tax

My daughter is not happy with the price of gasoline. It’s not something she had to think about before, but now that she’s the one at the pumps, she’s learning – quickly – what it takes to be a driver.

It’s a sentiment that many drivers feel, especially in parts of the country where state and local taxes combined increase the cost of filling your tank. According to AAA, the national average gas price is $3,498. It was just $2,507 a year ago.

Gasoline prices aren’t the only thing going up. Americans are feeling the impact of record high inflation, which would cost the average household an additional $276 a month. Everything, it seems, from food to furniture, costs us more.

To stop some of the bleeding, Sens. Mark Kelly (D-Arizona) and Maggie Hassan (DN.H.) introduced legislation for a federal gas tax holiday — a temporary suspension of the federal tax until Jan. 1, 2023. The proposal was met with skepticism, with Senator Minority Whip John Thune (RS.D.) suggesting that Republicans are unlikely to support him.

The back and forth on the issue has definitely shed light on the oft-overlooked federal gas tax. Here is an overview of its evolution.

The Federal Gas Tax Today

The federal gasoline tax currently stands at 18.4 cents per gallon, the same rate since 1993. Unlike many other inflation-related taxes and tax adjustments, the federal gasoline tax does not is not subject to automatic increases. This means that any increase or decrease is subject to a vote, a politically risky prospect.

Origins of the gas tax

The federal tax has been around for decades. In 1932, President Herbert Hoover authorized the first federal gasoline tax. This was not the first gas tax: this distinction is important, because several states had already imposed a gas tax at the time, Oregon in the lead in 1919.

The original tax was one cent per gallon, when the average cost of gasoline was about 10 cents per gallon in 1932. Adjusted to today’s dollars, the tax would be 20 cents per gallon and gasoline would only cost $1.97.

Unlike today, the federal gas tax was not initially reserved for highway or road projects. It was part of a larger tax package intended to bail out government coffers and balance the budget following the stock market crash that led to the Great Depression. The new law increased inheritance taxes, personal income taxes, and corporate taxes across the board, as well as excise and miscellaneous taxes. According to the Treasury Secretary’s report, the new gasoline tax was to be “levied for one year only, that is, until June 30, 1933.”

But the funny thing about taxes is that if they succeed, the government is in no rush to get rid of them. And that’s what happened here: the tax generated $125 million in the first year, as much as the next 18 excise taxes combined.

Gas tax continues

So the government did exactly what you expected and not only kept the gas tax but increased the rates. The National Industrial Recovery Act of 1933 increased the tax to 1.5 cents per gallon.

The tax was not very popular, and for good reason. The United States had not recovered from the Great Depression. In contrast, the banks failed, millions of people were out of work, and the government didn’t have enough money to pay its own workers.

In 1934, Congress returned the gasoline tax to its original penny per gallon. But there was a trade-off, as personal income tax rates hit a top tax rate of 63%.

Congress continued to extend the tax – on a “temporary” basis – each year until 1941, when it raised the tax to 1.5 cents per gallon and made it permanent as part of the Revenue Act. of 1941. The reason? The country was contemplating World War II, and more money was needed to help pay for the country’s military buildup.

When the Korean War started, it was easy to turn to the gas tax to quickly raise revenue. The Revenue Act of 1951 raised the gasoline tax to 2 cents per gallon, with the stated intention of repealing the tax entirely within a few years. This does not happen. Instead, the gasoline tax was extended in 1954 and again in 1955.

Highways Trust Fund

By 1956 America had firmly established its love affair with cars and highways. Gasoline tax was increased to 3 cents per gallon, but this time the money was not for defense or the general fund. Gas tax funds, along with auto sales and excise taxes, would be deposited into a new highway trust fund to be used to pay for a new interstate system and other highway projects. This system, modeled after the Social Security Trust Fund, remains in place today.

However, the gas tax rate would continue to increase. President Dwight Eisenhower signed another “temporary” gas tax increase in 1959 that lasted 24 years. In 1982, President Ronald Reagan authorized the largest increase in tax history: a spike of 5 cents, bringing the tax to 9 cents per gallon. This same legislation created a split in the Highway Trust Fund, allocating 20% ​​of increased revenue to public transit.

Reagan would raise the tax one last time before leaving office, signing a 0.1 cent increase into law to be used in the LUST fund, or Leaking Underground Storage Tank, which raised the tax to 9.1 cents in 1987. This increase really was temporary and the tax eventually fell back to 9 cents per gallon.

President George HW Bush broke his promise of “no new taxes” in 1990 when he signed another 5-cent gas tax increase, bringing the total to 14 cents per gallon. The administration also stood out for changing the use of the tax, with half of the increase targeted at deficit reduction.

The idea that you could use the gas tax for something other than roads – a decision not seen in decades – caught on, and in 1993 the gas tax was increased by 4.3 cents, the increase being intended to reduce the federal deficit. President Bill Clinton backtracked in 1993, keeping the gain on the books but returning it to the Highway Trust Fund. The 0.1 cent increase in LUST was also reinstated. This move to 18.4 cents per gallon marked the last time Congress raised or lowered the gasoline tax.

Calls for change

That doesn’t mean there haven’t been calls to change it. Notably, in 2008, presidential hopefuls Hillary Clinton and John McCain supported a gas tax exemption, while Barack Obama opposed it. The party’s hopes were dashed when President Bush’s spokesman pronounced her dead.

In 2010, then senator. George Voinovich (R-Ohio) argued unsuccessfully for raising the gas tax as a deficit reduction measure and to pay for investments in “our crumbling bridge, highway and transportation systems “. What he called at the time “a missed opportunity for the creation of thousands of well-paying jobs and long-term economic growth for our nation” sounds a lot like the arguments made for the recent infrastructure legislation.

What happens afterwards?

Today, the federal gas tax remains unpopular, although it is unclear how the federal government could pay for roads and bridges without it. The oldest sections of our interstate system – those created by Eisenhower – are over 60 years old. A whopping 42% of all bridges are at least 50 years old. Improvements and repairs were postponed or neglected in many cases.

Where will this money come from? This is one of the concerns raised by a gas tax exemption. There is no surplus to fill the void, in fact, quite the opposite. Last summer, the Congressional Budget Office predicted a negative balance in the Highway Trust Fund’s budget by the end of 2022. Even those balances could be ambitious: some taxes credited to the fund are due to expire at the end of the fiscal year. , but the CBO assumes they will continue to be collected.

By law, the trust fund is not allowed to have a negative balance. To keep it afloat, Congress transferred billions of dollars in general revenue to the trust fund, including $13.6 billion last year.

If the tax had been automatically adjusted for inflation, it would be 36 cents per gallon, nearly double what it is today, although the rate would, as one would expect, unpopular. But, as the Government Accountability Office noted, new user revenue can only come from taxes and fees. Something, it seems, must give way.

This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest tax news, tax law and tax policy. Look for Erb’s column each week in Bloomberg Tax and follow her on Twitter at @taxgirl.

Comments are closed.