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Rising Prices Fuel Discussions on Future of the Federal Gas Tax

Feb. 17, 2022, 9:45 AM

My daughter isn’t happy about the cost of gas. It isn’t something that she had to think about before, but now that she’s the one at the pump, she is learning—quickly—the cost of being a driver.

It’s a feeling that many drivers are feeling—especially in parts of the country where combined state and local taxes push up the cost of filling your tank. According to AAA, the national average price of gas is $3.498. It was just $2.507 a year ago.

The price of gas isn’t the only thing that’s going up. Americans are feeling the impact of record inflation, which is reportedly costing the average household an additional $276 per month. Everything, it seems, from food to furniture, is costing us more.

To stop some of the bleeding, Sens. Mark Kelly (D-Ariz.) and Maggie Hassan (D-N.H.) introduced legislation for a federal gas tax holiday—a temporary suspension of the federal tax through Jan. 1, 2023. The proposal was met with skepticism, with Senate Minority Whip John Thune (R-S.D.) suggesting that Republicans aren’t likely to support it.

The back and forth on the issue has definitely cast the often-overlooked federal gas tax into the spotlight. Here’s a look at its evolution.

Federal Gas Tax Today

The current federal gas tax stands at 18.4 cents per gallon, the same rate it’s been since 1993. Unlike many other taxes and tax adjustments that are tied to inflation, the federal gas tax is not subject to automatic increases. That means that any increases—or decreases—are subject to a vote, a politically dicey prospect.

Origins of Gas Tax

The federal tax has been around for decades. In 1932, President Herbert Hoover authorized the first federal gasoline tax. It wasn’t the first gas tax: That distinction is important, since several states had already imposed a gas tax at the time, with Oregon leading the way in 1919.

The original tax was one cent per gallon, while the average cost of gas was about 10 cents per gallon in 1932. Adjusted for today’s dollars, the tax would be 20 cents per gallon—and gas would cost just $1.97.

Unlike the present day, the federal gas tax was not initially earmarked for highway or road projects. It was part of a larger tax package intended to refill government coffers and balance the budget following the stock market crash leading to the Great Depression. The new law increased estate taxes, individual income taxes, and corporate taxes across the board, as well as excise and miscellaneous taxes. According to the Report of the Secretary of the Treasury, the new gasoline tax was to be “levied for one year only, that is, until June 30, 1933.”

But the funny thing about taxes is that if they’re successful, the government isn’t in a rush to get rid of them. And that’s what happened here: The tax generated $125 million in its first year, as much as the next 18 excise taxes put together.

Gas Tax Rolls On

So the government did exactly what you’d expect and not only held onto the gas tax but raised the rates. The National Industrial Recovery Act of 1933 increased the tax to 1.5 cents per gallon.

The tax wasn’t very popular, and with good reason. The U.S. had not recovered from the Great Depression. In contrast, banks failed, millions were unemployed, and the government didn’t have enough cash to pay its own workers.

In 1934, Congress rolled the gas tax back to its original penny per gallon. But there was a trade-off, as individual income tax rates hit a top tax rate of 63%.

Congress continued to extend the tax—on a “temporary” basis—each year until 1941, when it raised the tax to 1.5 cents per gallon and made it permanent as part of the Revenue Act of 1941. The reason? The country was eyeing World War II, and more money was needed to help pay for the country’s military buildup.

When the Korean War began, it was easy to look to the gas tax to boost revenues quickly. The Revenue Act of 1951 raised the gas tax to 2 cents per gallon, with a stated intention of repealing the tax entirely in a few years. That didn’t happen. Instead, the gas tax was extended in 1954 and again in 1955.

Highway Trust Fund

By 1956, America had firmly established its love affair with cars and highways. The gas tax was bumped to 3 cents per gallon, but this time, the money wasn’t destined for defense or the general fund. Funds from the gas tax, together with automotive sales and excise taxes, would be deposited into a new Highway Trust Fund to be used to pay for a new interstate system and other highway projects. That system, modeled after the Social Security trust fund, remains in place today.

The rate of the gas tax, however, would continue to increase. President Dwight Eisenhower signed another “temporary” increase in the gas tax in 1959, which lasted for 24 years. In 1982, President Ronald Reagan would authorize the most significant increase in the tax’s history: a 5-cent spike, bringing the tax to 9 cents per gallon. That same legislation created a split in the Highway Trust Fund, earmarking 20% of the increase in revenue for mass transit.

Reagan would bump the tax one last time before he left office, signing a .1 cent increase into law to be used in the cringeworthy-titled LUST, or Leaking Underground Storage Tank fund, bringing the tax to 9.1 cents in 1987. That increase really was temporary, and the tax eventually dropped back to 9 cents per gallon.

President George H. W. Bush broke his “no new taxes” pledge in 1990 when he signed another 5-cent increase in the gas tax into law, bringing the total to 14 cents per gallon. The administration was also notable for changing the use of the tax, as half of the increase was targeted to deficit reduction.

The idea that you could use the gas tax for something other than roads—a move not seen in decades—caught on, and in 1993, the gas tax went up by 4.3 cents, with the increase geared towards reducing the federal deficit. President Bill Clinton reversed course in 1993, keeping the gain on the books but sending it back to the Highway Trust Fund. The .1 cent LUST increase was also reinstated. That move to 18.4 cents per gallon marked the last time Congress boosted or lowered the gas tax.

Calls for Change

That doesn’t mean that there haven’t been calls to change it. Notably, in 2008, then-presidential hopefuls Hillary Clinton and John McCain supported a gas tax holiday, while Barack Obama opposed the measure. Hopes for the holiday were quashed when President Bush’s spokesperson declared it dead.

In 2010, then-Sen. George Voinovich (R-Ohio) unsuccessfully argued in favor of raising the gas tax as a deficit-cutting measure and to pay for investments in “our crumbling bridge, highway, and transit systems.” What he referred to at the time as “a missed opportunity for the creation of thousands of well paying jobs and long term economic growth for our Nation” sounds very much like the arguments made in favor of the recent infrastructure legislation.

What Comes Next?

Today, the federal gas tax remains unpopular, though it’s unclear how the federal government could pay for roads and bridges without it. Older sections of our interstate system—the ones created by Eisenhower—are over 60 years old. A whopping 42% of all bridges are at least 50 years old. Improvements and repairs have been pushed off or neglected in many cases.

Where will that money come from? That’s one concern raised by a gas tax holiday. There isn’t a surplus to fill the gap—in fact, it’s just the opposite. Last summer, the Congressional Budget Office predicted a negative balance in the Highway Trust Fund budget by the end of 2022. Even those balances might be ambitious: Some taxes credited to the fund are scheduled to expire at the fiscal year-end, but the CBO assumes they’ll continue to be collected.

By law, the trust fund isn’t allowed to have a negative balance. To keep it afloat, Congress has transferred billions of dollars of general revenue to the trust fund, including $13.6 billion just last year.

If the tax had automatically been adjusted for inflation, it would come in at 36 cents per gallon—nearly twice as much as it is today, though the rate would be predictably unpopular. But, as the Government Accountability Office has noted, new revenues from users can come only from taxes and fees. Something, it would seem, has to give.

This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com