Over the past decade, 30 states have increased or reformed their gas taxes. In Minnesota, the most recent attempt to increase the state’s gas tax by 20-cents-per-gallon failed during the last legislative session. However, efforts to increase the tax continue. In September of 2019, Minnesota Department of Transportation Commissioner Margaret Anderson Kelliher proposed a combination gas tax increase and debt service fee that would increase gas prices from 13 to 15 cents per gallon to cover infrastructure improvements.
Any proposal that would increase Minnesota’s gas tax ignores the preponderance of evidence showing gasoline levies are a regressive form of taxation that invariably shortchanges transportation networks. In recent years, the rise of fuel-efficient cars has decreased motor-fuel tax revenue. Even worse, these misguided taxes disproportionately shift the tax burden to low-income residents, a group that typically owns older, less-fuel-efficient vehicles.
As sales of fuel-efficient vehicles increase, revenue from gas taxes decreases. In other words, Minnesota must find new and more effective ways to cover the costs of transportation projects. 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.
John Phelan, an economist at the Minnesota-based Center of the American Experiment, argues the burden of government in Minnesota is already very high and that an increased gas tax is unnecessary. “The Minnesota state government’s revenues are at near-record highs in real terms and in real per capita terms. On top of this, they have a projected $1 billion budget surplus for the next biennium,” Phelan told Budget & Tax News. Phelan questions whether a gas tax hike is even necessary given Minnesota’s huge surplus and recommends an examination of the state’s lavish spending.
Further, owning a car is already expensive in Minnesota. According to a report by U.S. News and World Report, Minnesota is the 14th-most expensive state to own a car. “Compared to its neighbors, it costs $687 more to own a car in Minnesota than in Iowa, $1,311 more than in Wisconsin, $1,797 more than in South Dakota, and $2,889 more than in North Dakota,” the report found. The Center for the American Experiment also found 14 percent of the state’s roads are in poor condition.
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-related 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, and Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional spendable income per month for an average family.
Even worse, a 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 these added costs on to consumers.
Another method to reduce ever-growing transportation costs is to eliminate project labor agreements and prevailing wage laws. A project labor agreement (PLA) is a pre-hire collective bargaining pact establishing the terms and conditions of employment for a specific construction project. PLAs unfairly benefit organized labor and increase project costs paid by taxpayers. Studies by the Beacon Hill Institute and New Jersey Department of Labor found PLAs increase a project’s base construction bid and building costs. A 2015 Buckeye Institute report found PLAs can increase the cost of construction projects by 12-18 percent.
Prevailing wage laws are a form of centralized planning and wage control that increases government-contracted construction costs, reduces competition, and politicizes public projects. These laws force contractors to set unnecessarily high labor rates, often without any consideration for the type of work being done or employee skill levels. As an example, in 2013, the Anderson Economic Group estimated the impact of Michigan’s prevailing wage law on the average annual expenditures for construction of K–12 and higher-education facilities over a 10-year period. The results: prevailing wage laws cost Michigan taxpayers $2.24 billion in increased costs, an average of $224 million per year.
One reform that should be avoided is automatically indexing future gas tax increases to commodity prices or the Consumer Price Index. Indexing is problematic because it makes politicians and regulators less accountable for tax changes and can place upward pressure on the very measures used to determine the rate.
The following documents provide additional information about how motor-fuel taxes are applied and their effect on 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 principal 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://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://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 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://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://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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Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.