Introduction

In 1993 Congress approved a 4.3 cent per gallon increase in the Federal excise tax on all fuels used in transportation. This tax was in addition to the taxes already imposed on fuels.

The tax is imposed on aviation fuel, fuels used in automobiles and trucks, and diesel fuel used by railroads and the barge industry.

Some have proposed repealing the 1993 tax increase to help offset the recent increases in the price of gasoline, diesel, and aviation fuel.

This paper explains the consequences for Federal transportation programs of repealing this tax.
 

History Of The 4.3 Cent Tax

When the tax was originally imposed in 1993, all the revenues were dedicated to the General Fund. Now, the overwhelming majority of the revenue goes into trust funds for infrastructure investment.

In 1997, Congress transferred the revenue from the taxes imposed on highway users to the Highway Trust Fund to help pay for highway and transit infrastructure, and for highway safety programs. The 4.3 cent tax on gasoline and diesel brings in $7.2 billion to the Highway Trust Fund annually -- $5.8 billion for highways and $1.4 billion for transit.

In 1997, Congress also transferred the revenue from the aviation fuel tax into the Airport and Airway Trust Fund to support aviation programs. It brings in about $700 million per year.

The taxes paid by railroads and the barge industry still goes into the General Fund. The revenue amounts to about $190 million per year.
 

A Tax Cut Does Not Mean Lower Prices At The Pump

There is no guarantee that prices at the pump would fall if the tax were cut – especially in the short term.

The Federal tax is not actually imposed at the pump; it is collected shortly after it leaves the refinery. The fuel can pass through several middlemen before it reaches the consumer. None of these middlemen would have to pass along the savings. The reduced tax could simply be kept by those supplying the fuel.

Past experience has shown that as the wholesale cost of fuel goes up, prices at the pump increase. However, decreases in the wholesale price – or in the fuel tax -- have not been passed on to the motorists or truckers as consistently.

Several years ago, Connecticut reduced their State fuel tax but it did not translate into a price cut for the consumer. As the Hartford Courant noted in 1997, after prices failed to come down:

Furthermore, some States have laws that automatically increase the State tax if the Federal tax is reduced. In such States, there would be no tax savings to pass along.
 

Cutting The Tax Makes Little Economic Sense

Supply and demand are the basic determinants of the price of gasoline, not a few cents of a Federal excise tax. Reducing a Federal tax will do nothing to increase the supply and therefore lower the price.

In fact, reducing the tax is counterproductive because reducing a portion of the price without increasing the availability of crude oil makes it easier for OPEC to keep prices high.
 

The Impact On The Federal Highway And Transit Programs

Since the revenue from this tax is used for infrastructure and transportation safety programs, cutting it would reduce Federal support for these programs.

In 1998, Congress passed the Transportation Equity Act for the 21^st Century (TEA 21) that established a direct link between the funds deposited in the Highway Trust Fund and the funding returned to States and cities for highways and transit. In recent years, this has meant increased funding for the States and cities since receipts have been higher than expected. Under TEA 21, all highway programs – highway construction, highway safety, transportation enhancements, and high-priority projects -- are decreased proportionally if tax revenues fall short.

According to the Department of Transportation, if the 4.3 cent gas tax repeal were to take effect on July 1 of this year, the highway program would be cut by $20.5 billion through FY 2003 – the final year of TEA 21; $18.9 billion of that cut would translate into automatic cuts to the State formula funds (the attached table shows the cut by

State). The remainder of the funding does not go the States by formula.

The transit program would face similar devastating cuts. The Mass Transit Account of the Highway Trust Fund (which supports transit) would go broke in 2003. Continuing the transit program at the TEA 21 funding levels would not be possible after TEA 21 expires in 2003.

States and cities that have bonded their anticipated future Federal highway and transit funds to support transportation projects would have to cut programs even further.
 

Program Cuts Will Affect Safety

About 12,000 highway deaths per year are due to unsafe highway conditions. If the cuts are made, many road improvement projects would have to be put on hold.

Programs to fight drunk driving, encourage seatbelt use, and hire truck safety inspectors would also have to be cut.
 

Jobs Would Be Lost

According to the U.S. Department of Transportation, a billion dollars of highway spending supports about 42,000 jobs.

Therefore, an average of 420,000 high-paying jobs would be lost in each of years 2002 and 2003, for a total of 840,000 jobs over the two years. There would also be lost sales of construction equipment and materials.
 

The Problem With Using The General Fund To Make Up For The Shortfall In The Trust Funds

In effect, this means using most of the current non-Social Security budget surplus for transportation. This surplus is not then available for other priorities that Congress may want to fund or for tax cuts. It doesn’t make sense to replace a successful user fee with a broad-based tax.

This option also puts the highway, highway safety, and transit programs at risk when they are reauthorized by Congress in 2003 since the funding levels in TEA 21 will not be sustainable without a tax increase or continued transfers from the General Fund.
 

Solutions

The primary problem is lack of supply – not the Federal tax. The OPEC countries have reduced production which has resulted in constricted supplies and higher prices. Worldwide production must be increased in order for prices in the United States to come down.

Options include: putting pressure on oil producing countries to increase production; increasing domestic production; releasing oil from the Strategic Petroleum Reserve; allowing truckers to set rates that automatically adjust when fuel prices increase; increasing use of alternative fuels; and, providing direct tax credits to small businesses – such as independent truckers – impacted disproportionately by increased fuel costs.
 

The Effect On Aviation Programs

The 4.3 cent tax on aviation fuel raises about $700 million annually for the aviation trust fund.

The Senate just passed the Conference Report on the Aviation Investment and Reform Act for the 21^st Century (AIR 21) last week and it is scheduled to come up in the House this week. AIR 21 guarantees that airport improvements and Federal Aviation Administration (FAA) modernization are fully funded from the taxes and interest deposited in the Aviation Trust Fund. The remaining taxes and interest are available to pay for the operating expenses of the FAA. Reducing the tax, therefore, means that the General Fund contribution for FAA operations must be increased.

For the time period of fiscal years 2001 to 2003, the aviation trust fund would lose $2.1 billion.