Indexing the Gas Tax to Indicators of Need: An Analysis of Revenue Adequacy with Implications for Public Acceptance

The federal, state and local governments in the U.S. are facing a crisis in transportation finance and highway finance in particular. This crisis is mostly driven by (1) the public’s unwillingness to accept large increases in the gas tax, (2) greater vehicle fuel efficiency, and (3) substantial rises in input prices, construction costs and automobile use. These factors give rise to questions about the adequacy of the gas tax and its current structure to generate sufficient revenue. The authors argue that the public will be more willing to increase the gas tax if it is restructured to be directly connected to measures of need and is adjusted upward every year or so in small increments. They examine this approach to adequacy with simulations that adjust the gas tax rate to reflect changes in input prices and construction costs, improvements in fuel efficiency, and general inflation. They examine, at the aggregate national level, how variable-rate fuel taxes would affect gas tax revenues. They do so by simulating gas tax revenues given different adjustment formulas for the gas tax rate, and comparing gas tax revenues (per vehicle miles of travel) for the post-interstate highway years to determine revenue generating capacity of an indexed or variable rate approach.