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Research & Commentary: Dramatic Gas Tax Hike Won’t Help Alaska Maintain Its Roads

December 27, 2016

Alaska Gov. Bill Walker (I) recently introduced a proposal to hike the state’s gas tax rate as part of his 2018 budget plan. The tax would quadrouple from 8 cents per gallon to 24 cents per gallon on July 1, 2018.

Alaska Gov. Bill Walker (I) recently introduced a proposal to hike the state’s gas tax rate as part of his 2018 budget plan. The tax would first double from 8 cents per gallon to 16 cents per gallon on July 1, 2017, and it would then increase to 24 cents per gallon on July 1, 2018. Taxes on maritime fuel, aviation gas, and jet fuel would also rise at the same rate.

Increasing the tax on the sale of motor fuel increases the cost of transportation, which harms all consumers, including many low-income people. Gas taxes are designed by most national and state governments to raise revenue to pay for improvements to a transportation system, which often includes roads, bridges, and airports. In recent years, however, governments have increasingly diverted funds from transportation expenditures, their intended purpose, to help balance budgets or fund unrelated projects.

The Juneau Empire estimates the average consumer driving 13,476 miles per year at 22.5 miles per gallon would pay $143.74 more per year in state fuel taxes as a result of the proposal. The Alaska Department of Revenue says the increased tax would raise an extra $81 million per year. Although this sounds like a significant amount, it would only be a tiny step toward resolving the state’s current $3.6 billion budget deficit. Walker has proposed using part of the state’s Permanent Fund earnings to cover state services and has even proposed imposing (again) a state income tax, which would be charged at a rate of 6 percent of federal taxes paid, which his administration estimates will be roughly 1.5 percent of personal income. Alaska repealed its first income tax in 1980.

While supporters of a gas-tax hike argue Alaska’s low tax rate leaves room for an increase, gas taxes at any level have become increasingly ineffective at generating revenue for infrastructure projects. Mounting evidence shows gasoline taxes are an ineffective, regressive form of taxation that has increasingly left transportation systems shortchanged. In recent years, the rise of fuel-efficient cars has decreased motor-fuel-tax coffers and disproportionately shifted the burden to low-income drivers, a group that typically owns older, less-fuel-efficient vehicles.

The fact gas taxes have not increased over time does not mean they need to be increased now. While Alaska’s tax on gas is currently relatively low, the price of gas is higher in Alaska than in many states. According to AAA, the current average price for gasoline in Alaska is $2.64, which is 39 cents higher than the national average of $2.25.

Wendell Cox and Ronald Utt argue gas taxes have a stronger effect on lower- and middle-income families than they do on the wealthy. The tax could also cause low-income families to drive less, which could reduce employment options.

The main problem with transportation funding is poor spending practices, not a lack of revenue. Far too many dollars are spent on projects unrelated to roads, such as bike paths and museums. If gas taxes are intended as a user fee, gas-tax dollars should be spent on roads alone. In The Wealth of Nations, Adam Smith argues correctly when infrastructure spending is funded by user fees and decentralized, new construction occurs only when market demand justifies it.

It is not appropriate to add the burden of additional tax or fee increases on households that are already cash-strapped. A tax hike would raise prices on goods and services throughout the economy, not just on gasoline, because virtually all consumer goods are transported using gasoline-powered transportation. Businesses will simply pass the added costs on to consumers.

Alaska legislators should explore more modern and efficient ways to fund road construction and traffic infrastructure, such as privatizing roads and establishing toll systems. In several cities, transportation agencies are using congestion pricing—varying toll prices based on congestion—to manage demand and limit traffic problems.

The following documents provide additional information about how motor-fuel taxes are applied and the impact they have on states’ economies.

Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The eighth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual state and comparative accounts of the negative effects of income taxes.

Proposed Tax Increases in Alaska
http://taxfoundation.org/blog/proposed-tax-increases-alaska
Nicole Kaeding of the Tax Foundation examines Governor Bill Walker’s plan and how it would remove one of the key features of Alaska’s tax structure by levying a new individual income tax. “He would further erode Alaska’s corporate code by increasing marginal rates on specific industries, and transferring the oil and gas tax credit system into a loan program based on hires. Gov. Walker’s plan, if enacted, would move the state in the wrong direction.”

Alternatives to the Motor Fuel Tax
https://www.heartland.org/publications-resources/publications/alternatives-to-the-motor-fuel-tax?source=policybot
This report, prepared by the Center for Urban Studies at Portland State University and submitted to the Oregon Department of Transportation, evaluates potential alternatives to motor-fuel taxes. The report also identifies the economic and technological problems that must be addressed when designing alternative revenue sources.

Designing Alternatives to State Motor Fuel Taxes
https://www.heartland.org/publications-resources/publications/designing-alternatives-to-state--motor-fuel-taxes?source=policybot
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes as more fuel-efficient vehicles become available. They also report on the economic effects of road pricing as a substitute for fuel taxes.

Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-america 
Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation improvements.

Gasoline Fuel Tax Rates as of January 2016
https://www.artba.org/economics/research/gas-tax-history/
The American Road & Transportation Builders Association provides a map documenting state gasoline tax rates, using data from state Departments of Revenue.

Reconsider the Gas Tax: Paying for What You Get
https://www.heartland.org/publications-resources/publications/reconsider-the-gas-tax-paying-for-what-you-get?source=policybot
Jeffrey Brown of the University of California–Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of this purpose and lump it together with other unpopular taxes. The challenge for policymakers, Brown argues, is to restore the connection in the public’s mind between the tax and the roads it should provide.

Research & Commentary: Congestion Traffic Pricing
https://www.heartland.org/publications-resources/publications/research--commentary-congestion-traffic-pricing?source=policybot Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under congestion pricing, operators of a road charge a variable price based on congestion, allowing the operator to manage demand and limit congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion. 

Fuel Taxes, Tolls Pay for Only One-Third of Road Spending
https://www.heartland.org/news-opinion/news/fuel-taxes-tolls-pay-for-only-one-third-of-road-spending?source=policybot
Joseph Henchman of the Tax Foundation finds highway user taxes and fees made up just 32 percent of state and local spending on roads. Financing for the rest of the projects came out of general revenues, including federal aid.

Raising Gas Taxes Won’t Fix Our Bridges
https://www.heartland.org/publications-resources/publications/raising-gas-taxes--wont-fix-our-bridges?source=policybot
In the aftermath of the I-35 bridge collapse in Minneapolis, Minnesota, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. Moore wrote, “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.”

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s state government relations manager, at nmakla@heartland.org or 312/377-4000.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.