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Why the low gas tax should be hiked

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The federal gas tax is not at its lowest level in history.

But it’s really, really close when you adjust for inflation. And that comparable low rate stands as one of the big reasons it should be hiked.

The gas tax, last raised in 1993, sits at 18.4 cents per gallon. In 1932-1933 dollars, that comes to about 1.1 cents per gallon, or very close to the initial rate of 1 cent per gallon set in the Revenue Act of 1932 that created it. The first year of the tax generated $125 million in revenue.

In 1940, the tax was raised to 1.5 cents per gallon, which would be equivalent of a rate of 24.26 per gallon in 2011 dollars. (This tool helps you calculate CPI and the historical tax rates are here. Have at it.)

Current federal gas taxes, adjusted for inflation, dipped below the effective rate of today after the war and during the early 50s, but then came the Federal Highway Act of 1956. Taxes went to a whopping 3 cents a gallon, equivalent to 24.97 cents per gallon today.

Eisenhower raised the rate to 4 cents a gallon in 1959, popping it to an effective rate of 30.6 cents in today’s dollars. But then it stuck. The 4 cents per gallon rate stayed constant until 1983. The current rate, again, adjusted for inflation, was actually still lower than the tax applied during that 24 year period. Parity was approximately achieved in 1974 (the “modern” tax rate for that year would be 18.37 cents per gallon).

But when Reagan raised the rate to 9 cents per gallon in 1983, today’s rate became a bargain. Subsequent hikes by Bush (14 cents a gallon in 1990 dollar or 24.4 cents today) and Clinton (18.3 cents or 28.8 cents in today’s terms) kept older rates higher.

There are a few things to note. First, the hikes have occurred under both Republican and Democratic administrations: the most prominent increases, in fact, occurred under Republicans Hoover, Reagan and Eisenhower.

The increases have also occurred in good times and bad. The tax got inaugurated during the Great Depression, after all, and saw its last increases during the doldrums of late Bush-early Clinton. The increases under Eisenhower did not diminish the go-go economic time of the 1950s. Although dramatic spikes in the price of oil often presage recessions, the same can’t be said of fuel taxes.

Third, the money is desperately needed.  The Highway Trust Fund, which uses gas taxes to pay for freeway maintenance and construction, has been running short. Between 2008 and 2010, Congress voted it $34.5 billion in additional funds. The U.S. consumes about 322 billion gallons of oil a year (21 million barrels of oil a day with 42 gallons per barrel). Approximately 70 percent goes to transpiration. Under the current rates, that comes to around $59.2 billion. Raising it to 24 cents would increase that figure to $79 billion. A 30 cent rate would bring the total to $96 billion.

Taxes on diesel are already at 24.4 cents per gallon.

Granted, states also apply taxes. The average total tax on gas comes to 48.1 cents. But compare that to the United Kingdom. Fuel taxes come to 2.19 pounds, or $3.42, not including the 20 percent value added tax. Over 60 percent of the price at the pump goes to taxes and Britain (or at least most parts of it) has yet to fully return to the Stone Age. Germany’s fuel and value added taxes come to around 1.55 Euros per gallon for gas ($2.07) and 1.42 for diesel. Gas in Europe now goes for $5.60 per gallon (figures in liters) but the economic collapse has nothing to do with fuel. It’s about real estate lending.

Bill Ford, chairman emeritus of Ford Motor Company, advocates a $1 per gallon gas tax as a way to get consumers and producers to gravitate toward fuel efficient vehicles. So it’s a plus for construction and manufacturing jobs.

Few likes taxes. But even more people dislike potholes, traffic jams and collapsing bridges.

Image courtesy of Gavin St. Ours

3 Responses to “Why the low gas tax should be hiked”

  1. Taxpayers have subsidized Oil to the tune of $Trillions in wars for oil and military support for mid-east dictators. Those costs should be charged at the pump. This does two things, lowers the deficit, while charging the “True” cost of gas, which will probably be a dollar or two extra, spurring alternative vehicle technologies!

  2. If you are looking at Britain and asking similar tax rates, please be sane enough to ask for Britain/Europe type public transport infrastructure before asking for such tax rates.

    Public transport system in US sucks (compared to Europe), and its a tradeoff that the Americans have chosen, to fun their own transport instead of paying taxes to fund a good public transport system.