President Bush has sent his economic package to Congress, and the message is quite clear: America needs a tax break. The $674 billion package provides just that, with lower marginal tax rates, marriage penalty relief, and the elimination of the double taxation of dividends. Unfortunately, Congress may not be listening, too unwilling to give up old tax and spend ways. Not only has congressional spending soared in the last five years, now Congress is considering new taxes to continue to feed its habit. According to recent news reports, Rep. Don Young (R-Alaska), Chairman of the Transportation committee, has suggested an increase in the gasoline tax http://www.rollcall.com/pub/48_66/news/759-1.html to fund $375 billion in highway spending.
Clearly, talk of a gas tax hike is ill timed at best. Gasoline prices have been rising in recent months, with current prices averaging $1.69 per gallon nationwide and already topping $2.00 in some areas. With the threat of war in Iraq and uncertainty in the Middle East, the market for gasoline remains volatile and prices could increase even further, driven by increases in the price of crude oil. Nonetheless Rep. Young advocates increasing the tax and indexing the tax for inflation.
Not that long ago, there were some in Congress calling for the elimination of the gas tax. With the return of deficits, however, it is doubtful that these talks will be resumed. After all, the gas tax first saw the light of day in 1932 as a measure to reduce the deficit. The economy was flagging and income tax revenues were down, so Franklin Roosevelt signed the gas tax into law—but only as a temporary measure. Yet, like most taxes enacted by Washington, the gas tax remains on the books and today consumers pay both a federal and state gas tax. In 1956, the Highway Trust Fund was created to ensure the revenues from the gas tax were reserved for highway and transportation projects. Although Congress, on numerous occasions, has enacted laws intending to reduce or phase out the gas tax, lawmakers have always managed extend the tax before the tax expired.
The current federal tax is 18.4 cents per gallon, and the state taxes average just over 22 cents according to the Federal Highway Administration . Taxpayers pay over $50 billion annually in taxes on gasoline, and this figure excludes taxes paid by diesel fuel users (which are even higher). This breaks down to an annual gas tax of around $660 for the average family, and economist William Beuchner estimates that every penny increase in the gas tax increases the annual tax bill by $25. Should Congress move forward with the Transportation Chair’s proposal of a tax increase of 5.4 cents, families could see their tax burden increase by $135, for a total gas tax of almost $800 annually.
Although the president has championed an agenda of tax cuts, the push to increase the gas tax will play out as Congress attempts to reauthorize the “Transportation Equity Act for the 21st Century” (TEA-21). This legislation establishes spending priorities for highway and transportation projects, and always has been a political battleground as lawmakers compete for their share of federal transportation dollars. Spending has increased significantly in recent years, but with deficits returning, the struggle for federal dollars will become more intense. In his budget request, President Bush proposes $29.3 billion in federal highway spending, yet lawmakers claim this is not enough and are seeking additional revenues from a higher gas tax to fuel more spending. Even worse, proposals to index the tax to inflation would create an automatic tax increase that Congress does not have to debate.
Efforts to increase taxes for more federal spending fly in the face of the administration’s economic growth plan. Government spending across the board has been rising, and spending increased by almost $800 billion in just four years, according to Brian Riedl of the Heritage Foundation. The administration’s budget proposal for 2004 was $2.2 trillion dollars—equivalent to 19.7 percent of the nation’s output. The president has raised questions about congressional spending, and rightly so. A new gas tax does nothing to renew fiscal discipline; rather, it encourages the status quo by ignoring the need to establish new priorities with respect to federal spending. Efforts to increase the gas tax should be rejected and Congress should be encouraged to focus on the important work of passing the president’s economic growth package.