By Elaine Mejia
Earlier this month, presidential hopefuls John McCain and Hillary Clinton, along with gubernatorial candidate Bill Graham, endorsed a temporary gas tax holiday to last through the summer vacation season. These proposals should come as no surprise given the squeeze that rising gas prices is putting on middle-class families.
While the notion of suspending the federal and state gas taxes is attractive in its simplicity and political popularity, it would do little to help working families affected by the downturn in the economy. Moreover, it would have devastating consequences on already-strained public-road construction and maintenance budgets.
The state gas tax is currently set at 30.15 cents per gallon. The federal gas tax is another 18.4 cents for a total of 48.55 cents per gallon. That amounts to about 14 percent of the current price of a gallon of unleaded gasoline.
It’s important to note that the gas tax is an excise tax and not a sales tax. So when a driver purchases gas, the amount he pays in tax isn’t shown as a separate expense on the receipt. Unlike sales taxes, the gas tax is included in the price of the product — so when the sign outside of a gas station says that gas is $3.55 per gallon, that price includes the tax.
Because the tax is set per gallon rather than as a percentage of the purchase price, the amount paid doesn’t go up when the price of gas goes up. In fact, as people transition to more fuel-efficient vehicles they end up paying less in gas tax per mile driven. This, along with skyrocketing costs to construct and maintain roads, is why national and state transportation budgets are in such a bind. While drivers are paying less in gas taxes overall per mile driven, their wear and tear on the roads is not declining.
If the tax were cut, even temporarily, as has been proposed, the price of gas might drop initially, but then it might go up again to as high as, or possibly even higher than, it was before. That’s because oil and gas companies are not obligated not to raise their prices after the tax is cut. And with the complicated way that prices are set, who’s to say that companies won’t raise their prices in response to the tax cut?
In addition to the fact that the price of gas wouldn’t necessarily go down if the tax is cut, federal and state highway budgets cannot absorb this loss of revenue. They would have to cut back on already-underfunded highway needs.
Even if the federal gas tax is left alone, experts say that the tax will actually need to increase by at least 12 cents per gallon next year in order for the federal government to continue paying the same share of transportation costs nationwide. In fairness, Sen. Clinton’s plan would offset the loss in federal gas tax revenue by instituting a “windfall profits tax†on oil and gas companies, but the likelihood of such a tax being enacted and signed by Pres. Bush is anything but certain.
The North Carolina transportation budget is in similarly dire straits. The Department of Transportation is projecting a multi-billion funding shortfall over the next three decades. If the federal gas tax doesn’t increase, then North Carolina will be footing the bill for an even greater share of road costs in our state.
So federal and state highway funds are broke because of skyrocketing costs and increasing fuel economy. Moreover, a gas tax cut might not even be felt at the pump and instead might serve to further inflate the profits of gas and oil companies. It’s no wonder that proposals to suspend the tax are, like many working families, going nowhere this summer.
Elaine Mejia is the director of the N.C. Budget and Tax Center.