Some perspective on the gas tax


The federal highway trust fund is going broke, one of those long-known realities that is finally starting to sink in among the official nattering nabobs. Whether it is the New York Times, the USA Today or Slate (the hysterics of which I found particularly laughable), the analysis comes right from the American Society of Civil Engineers’ (ASCE) talking points. Even the Daily Show has weighed in. Here’s what we are to believe:

The gas tax needs to go up because (1) it has not been increased since 1993 so inflation has eroded a lot of its purchasing power (wait – I thought inflation was good). Then there is (2), our cars have gotten more fuel efficient and so the gas tax doesn’t go nearly as far as it once did. Finally, (3) we have horrible congestion, safety problems and we need the economic growth that comes with transportation investments.

I started wondering….how big would the funding gap be if we had indexed the gas tax to inflation back in 1993? What if we had indexed it to economic growth? We if we had adjusted it for average daily traffic, probably the best measure of demand given the fuel efficiency issue? Here’s what those answers look like when compared to the revenue the ASCE indicates is needed to continue on the current path ($94 billion additional per year).

I’ve passed this around and people want to know the math, which I’m going to provide below, but here’s the takeaway: we may have a funding problem, but that’s not what is going to take us down. Our real problem is that we have not had to think about what we are doing for a long, long time. We’ve been so wealthy and affluent that funding the most bizarre transportation arrangement on earth became akin to the American way of life. Congestion-free roadways and ample parking are to the United States what bread and circuses were to Rome. Get out your fiddle, that smoke is real.

The question facing us now isn’t whether or not to increase funding for transportation but whether or not to reform – or even question – the very nature of our approach to transportation. An increase in the gas tax, additional sales taxes/fees or more deficit spending only allow us to continue to distort – for a few more years – a transportation system that is not financially viable. Without any price signals providing supply/demand feedback, we are destined to build ourselves into insolvency (again).

And a final word to you transit and bike/ped advocates who have been promised riches if you’ll get behind calls for more money for this system: you are fighting for scraps today with disingenuous partners when, if you simply walked over the next ridge, you would find more financial support than you ever dreamed. That ridge: localization.

We had the greatest transit and the greatest pedestrian facilities before we had centralized transportation policy. Bike/ped and (when not done by highway engineers) transit improvements are the highest returning transportation investments a city can make. Phase the federal and state governments out of this game and you open up enormous possibilities for bringing about the world you desire. Stick with this tired approach and you will continue to be an afterthought in a system that is going bankrupt.

Now the math…

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There is one overriding assumption to my calculations that I know to be false, but here it is: I assume a static response to price increases. In other words, as the price goes up, I assume that people absorb the increase and continue to drive just as much. They will not.

There is a complex and dynamic feedback loop that occurs when energy prices increase that cannot be accurately modeled. The end result for my calculations is that I overestimate the amount of revenue to be gained from an indexing to inflation, gdp and traffic and I underestimate the amount of gas tax increase needed to meet our needs. Since the startling thing about this analysis is the gap between what a reasonable increase would produce and what is needed, guessing at a dynamic feedback loop would simply be running up the score. The gap is already too big to overcome; we need to start thinking differently.

Just know that, when you are looking at the chart, the inflation, GDP and traffic lines should be lower, and the need line much higher, than what is represented. I've attached my spreadsheet so you can mess with it yourself.

I began my analysis with our actual fuel tax receipts since 1994. These I obtained from the Federal Highway Administration.

I then took the consumer price index as an inflation adjustor from the Bureau of Labor and Statistics (Table 24) and adjusted the gas tax by inflation for each year. At the end of last year, the inflation adjusted federal gas tax would be 29.7 cents per gallon. This is a 57.3% increase that would produce (again, with a static analysis) an additional $16.7 billion, enough to close the present hole in the trust fund.

The GDP numbers worked out in much the same way. I obtained them from About.com (top of the Google search). A federal gas tax that grew as fast as the economy would currently be at 30.1 cents per gallon and produce an additional $17.3 billion dollars annually (assuming a static response).

I’m not one who believes there is a direct relationship between transportation investments and economic growth so I thought it important to model a non-economic statistic. Average Daily Traffic (ADT) is about as close as we can get to measuring actual demand in a system where the relationship between supply and demand is shrouded in a web of perverse incentives. I obtained ADT numbers from the Federal Highway Administration. Growth in traffic was substantially less than economic growth over the years in question. Adjusted for ADT, the 1993 gas tax would today be 23.8 cents per gallon. This would add $7.6 billion to the trust fund.

The adjustment for funding need is certainly going to be the most debated number I’m putting forward – as it should be. I used the headline number from the American Society of Civil Engineers, which states on their website:

ASCE’s economic report on surface transportation, released in July 2011, found that our deteriorating infrastructure will cost the American economy more than 876,000 jobs and suppress the growth of our GDP by $897 billion by the year 2020. 

We are facing a funding gap of about $94 billion a year with our current spending levels.

To get 77.7 cents per gallon, I use a simple ratio of current spending with total needed spending.

I'll repeat that this is a static analysis and thus 77.7 cents is a low number. If gas prices were to rise that much there would be many people who would drive less or choose a different mode of travel. This means the gas tax would need to go up even higher to collect the same amount of revenue. At some point the situation becomes a dog chasing its tail; every price increase prompts a reduction in driving and the need for more price increases. Ultimately the gas tax funding mechanism would collapse and/or driving would become an activity for only an elite few. That's difficult to see happening politically.

A final word about the ASCE need number. Those of you that have read Strong Towns for any appreciable time period know that I am not a fan of ASCE. They are not a group that works to support the noble engineering profession but a special interest group that advocates for more public funding for its members. It uses shameless tactics, including distorted math, to make the case. Any numbers put forth by ASCE should be highly suspect.

So why would I use their number for need? I use it because the ASCE approach is actually how engineers and city officials put together their list of needs. I’ve been in the meetings, been part of assembling the capital improvement plans. We used to call them “guaranteed employment plans” because the engineers would program into them their next five years’ worth of work and then go out and chase the funding. There is always a lot of padding in these plans masquerading as “need”, the money that then flows to the city creating – via the mechanisms by which it flows – a prioritization of the large, new project over the routine maintenance.

I use the ASCE number because there is no limit to the “need” we can come up with if there is enough money. There is no feedback – no direct price that any consumer of the system pays – for its use and so there is no signal discerning actual demand. No way to determine a want from a need. The goal is a congestion free commute with ample, cheap parking for all along with all the ribbon cuttings and well-paying construction jobs.

I use the ASCE number because it represents an America where we don’t have to think very hard, one with an embarrassment of riches available to cover up our immediate folly and allow us to put off anything truly difficult. One where the only real feedback is total failure. That’s a fragile place. It is yesterday's America. This generation's challenge is to change it.

We’re running out of money. It’s time to start thinking.

Spreadsheet with data