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Research & Commentary: Local Gas Taxes are One Tax too Many for Illinois Drivers

February 14, 2020

In this Research & Commentary, Matthew Glans examines a new bill recently proposed in the Illinois General Assembly that would allow non-home rule local governments to create a municipal gas tax on top of state and federal gas taxes.

Funding transportation projects has become a major problem for Illinois, as it has for many other states. Profligate spending is an issue that has long plagued transportation funding. Inflated labor costs and big bureaucracy often increase the costs of infrastructure projects far above initial estimates. As more fuel-efficient vehicles enter the market, gasoline tax revenues will continue to decline. Consequently, state lawmakers need to consider more modern and effective ways to fund road construction and traffic infrastructure.

Any proposal increasing the gas tax ignores the mounting evidence showing gasoline levies are a regressive form of taxation that have 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.

Illinois took a step in the wrong direction in 2019 when lawmakers passed legislation that doubled the motor fuel tax set at the state level to 38 cents from 19 cents per gallon. This hike, which went into effect in July 2019, will increase each year based on a formula tied to inflation, a mechanism known as indexing; the increases are limited to a maximum of 1 cent per year.

The 2019 fuel tax hike moved Illinois from having the 10th-highest overall gas tax burden in the nation to the third-highest, according to the Tax Foundation. The Illinois Policy Institute (IPI) expects the gas tax will take $1.2 billion more from Illinois drivers, or an average of $100 more per driver in the first year alone. One of the main reasons the Prairie State’s gas taxes are amongst the highest in the nation is because Illinois is one of only seven states that also applies a sales tax to gasoline purchases, which is added on top of state and local motor fuel taxes.

In addition to the state tax, the 2019 legislation also allow Chicago and the collar counties around Chicago to increase their local gas taxes (Chicago by 3 cents; DuPage, Kane, McHenry, Lake, and Will Counties to 8 cents per gallon). These additional hikes could make Illinois’ average gas tax burden the highest or second-highest in the nation.

A new bill recently proposed in the Illinois General Assembly would compound this mistake by allowing non-home rule local governments to create a municipal gas tax on top of state and federal gas taxes. The new bill, Senate Bill 2978, would allow municipal governments to impose an extra 3 cent per gallon gas tax on consumers. Local municipalities would be able to impose a tax only in one-cent increments, at a rate not to exceed $0.03 per gallon. These taxes would be especially difficult to administer because gas retailers will have to track and impose several different local taxes.

In 2015, Daniel Vock, writing for Governing, analyzed state gas tax data reported to the U.S. Census Bureau and found two-thirds of state fuel taxes failed to keep up with inflation, leading to dramatic reductions in fuel-tax revenue. In a Maryland Public Policy Institute study, Wendell Cox and Ronald Utt argue gas taxes have a significantly greater detrimental effect on lower- and middle-income families than they do on the wealthy. Moreover, Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional income per month for an average family.

IPI argues legislators should consider the inflated cost of public construction projects in Illinois before they allow any tax or fee hikes. Austin Berg, Director of Content Strategy for the Illinois Policy Institute, points to high compensation costs for Illinois workers—Illinois has the highest workers’ compensation costs in the Midwest—and prevailing-wage requirements as key cost drivers for Illinois transportation projects. As an example, Berg compared Illinois to Indiana and found Indiana’s average workers’ compensation insurance premium costs made up only 4 percent of an average payroll, compared to 22 percent in Illinois.

It is not appropriate to add the burden of additional tax or fee increases on households that are already cash-strapped. Even worse, a gas tax hike would raise prices on goods and services throughout the economy because virtually all consumer goods are transported using gasoline-powered vehicles. In fact, nearly 70 percent of all freight transported annually in the United States, accounting for manufactured and retail goods worth $671 billion, is transported by truck, according to Truckinfo.net. Businesses will simply pass the added costs on to consumers.

Illinois will have to explore more efficient ways to fund road construction and traffic infrastructure. These include privatizing roads and expanding 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 their effect on the economy.


Hosed at the Pump: Illinois Gas Taxes
https://www.illinoispolicy.org/hosed-at-the-pump-illinois-gas-taxes/
This article from the Illinois Policy Institute discusses the state gasoline sales tax, how it harms Illinois drivers, and why this high tax is inefficient and unnecessary. Illinois is one of only seven states charging a sales tax at the gas pump. “Illinois should follow the lead of the 43 states that don’t charge a sales tax on gasoline and end this practice, saving taxpayers millions of dollars.”

Senate Bill would Double Illinois State Gas Tax
https://www.illinoispolicy.org/senate-bill-would-double-illinois-state-gas-tax/
Vincent Caruso of the Illinois Policy Institute examines the proposed gasoline tax hike and how it would add a substantial burden to Illinois drivers and the economy.

Dispelling the Myths: Toll and Fuel Tax Collection Costs in the 21st Century
https://reason.org/wp-content/uploads/2012/11/dispelling_toll_and_gas_tax_collection_myths.pdf
In this Reason Foundation Policy Study, Daryl S. Fleming examines all-electronic tolling, its basic operations plan and business model, the primary factors affecting toll collection costs, and a number of reforms states can make to reduce the cost of toll collection.

23rd Annual Highway Report on the Performance of State Highway Systems
https://reason.org/wp-content/uploads/2018/01/23rd_annual_highway_report.pdf
In this report, the Reason Foundation ranks the performance of state highway systems in 11 categories, including spending per mile, pavement conditions, deficient bridges, traffic congestion, and fatality rates.

State Motor Fuel Taxes
https://www.api.org/oil-and-natural-gas/consumer-information/motor-fuel-taxes/gasoline-tax
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel). 

Alternatives to the Motor Fuel Tax
https://www.heartland.org/publications-resources/publications/alternatives-to-the-motor-fuel-tax 
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
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes in a world in which more fuel-efficient vehicles are rapidly becoming 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 
In this paper from the Tax Foundation, 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 projects. 

Research & Commentary: Congestion Traffic Pricing
https://www.heartland.org/publications-resources/publications/research--commentary-congestion-traffic-pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under a congestion pricing model, road operators charge a variable price based on congestion, thereby managing demand and limiting congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.

Raising Gas Taxes Won’t Fix Our Bridges
https://www.heartland.org/publications-resources/publications/raising-gas-taxes--wont-fix-our-bridges
In this paper, 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.

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