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Research & Commentary: Overtaxed Illinois Residents Cannot Afford Gas Tax Hikes

April 18, 2019

In this Research & Commentary, Matthew Glans examines a proposed increase of Illinois’ gasoline tax along with several vehicle and registration fee hikes.

Over the past five years, 26 states have increased their gas taxes, and many others are considering similar hikes. In Illinois, state legislators are now considering a major transportation funding proposal that would increase the state’s fuel tax, increase fees on licensing and registration and allow local governments to impose an additional layer of fuel taxes.

Proposed as an amendment to Senate Bill 103, the proposal would double the motor fuel tax set at the state level to 38 cents from 19 cents per gallon. This hike would go into effect in July 2019, and increase each year based on a formula tied to inflation, a mechanism known as indexing; the increases would be limited to a maximum of 1 cent per year. Tying any tax rate to a certain commodity price or the Consumer Price Index is problematic and makes politicians and regulators less accountable for tax changes. Even worse, this can contribute to higher prices by placing upward pressure on the very measures used to determine the rate.

Illinois taxpayers are already amongst the highest taxed in the nation. Currently, the combined state and local tax rates in Illinois ranked dead last in severity according to a March report by WalletHub. The average effective state and local tax rate on an Illinois household at the median U.S. income adds up to an oppressive 14.9 percent.

One of the main reasons Illinois’ 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. As recently as 2011, Illinoisans paid the third highest combined local, state, and federal gas taxes in the nation. According to the Illinois Policy Institute (IPI), the new proposal in Springfield would accelerate residents’ gas tax burden to second-highest in the nation.

In addition to the fuel tax increase, the tax hike proposal includes several new “fees,” which are better described as taxes, including a $50 increase in the price for new license plates, a $130 hike in the cost of registration renewal for electric vehicles, a $50 hike in annual registration sticker fees, a $30 hike in the cost for a driver license, a $60 increase on vehicle titles and a $100 “weight tax” hike across all truck classes. In addition to these increased fees, a clear example of nickel and diming by the state, the bill would also allow certain counties in and near Chicago to impose local gas taxes as high as 8 cents per gallon.

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.

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.

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 Illinois’ high workers’ compensation costs – 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, not just on gasoline because virtually all consumer goods are transported using gasoline-powered transportation. 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 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://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 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.

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 Lennie Jarratt, a state government relations manager at The Heartland Institute, at ljarratt@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. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR