Inflation Drives Federal Gas Tax Down Almost 40%

Congress seems to be nearing agreement on a plan to extend transportation infrastructure spending for another two months, but it also appears to be at a loss for ideas on how to continue these critical investments after the fund becomes insolvent toward the end of July. 

The root cause of this recurring crisis is an obvious, easily fixable flaw in the gas tax’s design—the tax remains the same, with no adjustments for inflation unless lawmakers agree to change it.  States that recognize the economic importance of their transportation networks are increasingly taking steps to address this flaw, but federal lawmakers lack the political will to increase the gas tax and have repeatedly sidestepped the issue with 33 short-term fixes.

As with most things in our economy, the cost of building and maintaining our transportation network grows more expensive over time.  Asphalt, concrete, and machinery prices are subject to inflation in much the same way as food, furniture, and all the other products that shoppers have seen grow in cost over the years.

This is not an unusual or surprising problem.  But it does require that we pay for our transportation network with a sustainable revenue source.  Unfortunately, the federal gasoline tax (the single largest source of transportation funding in the county) does not fit this description because of a glaring flaw in its design.  Rather than growing with inflation each year, the federal gas tax has been fixed at 18.4 cents for more than 21 years.  Because of this, drivers have been paying roughly $3 in federal tax on each tank of gas for two decades, despite the fact that $3 buys significantly less maintenance and construction than it did in the 1990’s.

The nearby chart shows that if the federal gas tax rate is measured relative to growth in road construction costs, the tax has lost 38 percent of its value since Congress last increased it in 1993.  To be clear, this does not suggest that construction costs have grown in an unprecedented or unexpected way.  The problem has been a long, slow, inevitable decline in purchasing power for which lawmakers failed to plan.  If we measure the gas tax rate relative to a broader, more familiar measure of general inflation in the economy (the Consumer Price Index), the result is almost identical: a 39 percent decline.

Offsetting these decades worth of inflation would require an immediate increase in the tax rate of 11 or 12 cents per gallon.  But a one-time boost in the gas tax rate will not address the unavoidable, ongoing impact that inflation will have in the future.  For that, lawmakers should look to other parts of the tax code for inspiration.  Numerous tax brackets, exemptions, deductions, credits, and even the Alternative Minimum Tax are now tied to inflation so that they can grow modestly every year and retain their “real” value.  A very similar fix—which is growing in popularity at the state level—would put an end to these recurring funding crises for years to come, and would allow for infrastructure maintenance and expansions that are vitally important to the economy.