Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the Federal Gas Tax Lost 40 Percent of Its Buying Power
Transcript
- Lucas: The federal gas tax is 18.4 cents per gallon. It has been 18.4 cents per gallon since 1993. That is thirty-three years without an adjustment. Luna: Thirty-three years. So the tax has lost, what, something like a third of its value just to inflation? Lucas: More than a third. Cumulative inflation since 1993 is roughly 97 percent. That means 18.4 cents in 1993 has the purchasing power of about 9.3 cents today. So the tax has effectively been cut in half without Congress ever voting to cut it. Luna: And that tax is the primary revenue source for the Highway Trust Fund, right? The fund that pays for interstate repairs, bridges, transit projects. Lucas: Exactly. The Highway Trust Fund gets most of its money from the federal excise tax on gasoline and diesel. In fiscal year 2025, the fund took in about 38 billion dollars from fuel taxes. But the authorized spending level for highways and transit was roughly 60 billion. That gap of over 20 billion dollars gets filled by transfers from the general fund — which is just a polite way of saying deficit spending. Luna: So the trust fund hasn't been self-sustaining for years. And it's only getting worse as cars become more fuel-efficient and electric vehicles grow their market share. Lucas: That's the double squeeze. On one side, inflation erodes the real value per gallon. On the other, fuel consumption per mile driven keeps falling. The average light-duty vehicle on the road today gets about 26 miles per gallon, up from around 21 in 1993. And EVs pay zero federal gas tax. So the tax base is literally shrinking per mile traveled. Luna: And the political response has been to just kick the can. Congress hasn't raised the rate since 1993. I remember reading that even the 1993 increase was controversial — it passed by one vote in the House. Lucas: Bill Clinton pushed it through as part of his deficit reduction package, with the promise it would be temporary. It wasn't. But the political scar tissue from that vote has made subsequent increases nearly impossible. No lawmaker wants to be the one who voted to raise the gas tax, even if the alternative is a decade of general-fund bailouts. Luna: Right, because the general fund transfer isn't visible to voters as a tax increase. It just becomes part of the deficit. So the cost is hidden and spread out. Lucas: That's the key political economy dynamic. A direct user fee — the gas tax — is transparent. You see the price at the pump. A general fund transfer is opaque. It's financed by income taxes, corporate taxes, borrowing — none of which feel connected to the road you're driving on. So the incentive for Congress is to let the gas tax erode and backfill the trust fund with general money. Luna: But that breaks the user-pays principle. If you drive more, you buy more gas, you pay more tax. That's a rough proxy for your use of the roads. Once you sever that link, there's less price signal for how much we should be spending on roads. Lucas: And less incentive for efficiency. If the per-mile cost of driving is artificially low because the tax hasn't kept up, people drive more than they would if the full cost were reflected. Economists call that a Pigouvian problem — the price doesn't include the negative externality of congestion, wear and tear, emissions. Luna: So how much revenue are we leaving on the table? If the gas tax had simply been indexed to inflation since 1993, what would the rate be today? Lucas: About 36 cents per gallon. And the Highway Trust Fund would probably be solvent without general fund transfers. The Congressional Budget Office has run the numbers. If you'd indexed the tax to inflation in 1993, the cumulative revenue through 2025 would have been roughly 200 billion dollars higher. That's not pocket change. Luna: Two hundred billion. Enough to cover the current shortfall and then some. But lawmakers didn't index it, and now we're stuck with a broken system. Lucas: And the alternatives all have their own problems. Some states have stepped in. California's gas tax is now about 58 cents a gallon, indexed to inflation. Oregon is piloting a mileage-based road usage charge — you pay per mile driven rather than per gallon. But those are state-level fixes. The federal system remains frozen. Luna: And the mileage-based approach raises privacy concerns. The Oregon pilot tracks miles, and some drivers worry about government surveillance of their movements. Lucas: It's a legitimate concern. The Oregon program offers several reporting methods — a plug-in device, a smartphone app, or an odometer reading at inspection. But none are perfectly private. That's one reason the federal government hasn't pushed a national VMT tax. The political cost of demanding mileage data is probably higher than the cost of just transferring general funds. Luna: So we're in a kind of equilibrium. A bad equilibrium, but stable. The trust fund gets bailed out, the gas tax stays frozen, and no one takes the political risk of trying to fix it. Lucas: Exactly. And the longer we wait, the bigger the adjustment would be. If Congress suddenly indexed the tax today, the rate would jump from 18.4 cents to about 36 cents. That would be a massive price signal at the pump. But if they'd done a gradual indexation over the last three decades, drivers would barely have noticed. Luna: It's a classic case of kick the can fiscal policy. The cost of inaction grows quietly, and then one day you're staring at a 20 billion dollar annual hole. Lucas: And that hole only gets deeper as electric vehicle adoption rises. The Biden administration set a target of 50 percent EV sales by 2030. If that happens, gas tax revenue could fall by another 30 to 40 percent. The trust fund would need a whole new revenue source. Luna: Right. So eventually, Congress will have to act. Either they raise the gas tax, or they implement a VMT tax, or they find some other dedicated revenue stream. The status quo isn't sustainable. Lucas: It's not. And that's what makes this such a telling fiscal policy story. The gas tax is one of the few federal taxes that functions as a direct user fee. It's efficient, it's transparent, and it's politically toxic. So lawmakers have quietly defunded it by doing nothing. Luna: And by doing nothing, they've effectively chosen a less transparent, less efficient way to fund highways — general fund transfers. Which means all taxpayers pay for roads, not just the people who use them. Lucas: That's the bottom line. The federal gas tax is a textbook case of how inflation can quietly rewrite fiscal policy when a nominal tax rate is left unchanged. It's not a dramatic crisis — no bridges are collapsing tomorrow because of it. But it's a slow bleed that costs taxpayers billions and distorts transportation decisions. Luna: And if walking through the economy with us has made something click — whether it's the gas tax or any of the other topics we cover — it's worth mentioning that listener support is what keeps this show ad-free and independent. A couple of dollars a month genuinely makes a difference. Buy me a coffee dot com slash fexingo, if you've gotten something out of these conversations. Lucas: Yeah, it's a small thing that adds up. And it's why we don't have to run sponsor spots or chase clicks. So thank you to anyone who's contributed. Luna: Absolutely. Back to the gas tax — one more angle I find interesting. The tax isn't even levied as a percentage of the price. It's a flat per-gallon amount. So when gas prices spike, the tax's share of the pump price shrinks. When prices drop, the tax's share rises. That adds another layer of weirdness. Lucas: Right. It's a specific excise tax, not an ad valorem tax. That means the real burden on consumers fluctuates with the oil market. In 2022, when gas hit five dollars a gallon, the federal tax was less than 4 percent of the price. In 2020, when prices crashed to under two dollars, the tax was over 10 percent. That's a wild swing in the effective tax rate. Luna: So the tax becomes more regressive during periods of low prices, because it takes a larger share of income for lower-income drivers. And less regressive when prices are high. But the net effect is still a flat tax that hits low-income households harder than high-income ones, because they spend a larger share of their income on transportation. Lucas: That's the regressivity argument in a nutshell. The gas tax is generally considered regressive, but it's less regressive than a flat per-mile tax would be, because low-income households tend to drive older, less fuel-efficient vehicles. So they consume more gas per mile, paying more tax relative to their income. Luna: And then there's the rural-urban divide. People in rural areas drive more miles, so they pay more gas tax per person. But they also benefit from roads that connect them to urban centers. It's a complicated equity picture. Lucas: It is. And that complexity is another reason Congress has punted. Every reform option has winners and losers. Indexing the tax would hit all drivers. Moving to a VMT tax would hit rural drivers harder. Raising the rate would be a visible increase. So the path of least resistance is to do nothing and let the general fund absorb the shortfall. Luna: Which is exactly what we've seen for over three decades. The question is whether that changes as EVs become mainstream and the trust fund shortfall grows into a full-blown crisis. Lucas: Crisis tends to force action. The question is what form that action takes. A national VMT tax is the most economically efficient solution, but it's a political minefield. A higher gas tax is simpler but regressive. A general-fund bailout is the status quo but breaks the user-pays link. Luna: Or some hybrid. A small increase in the gas tax paired with a low-mileage VMT tax for EVs. That might be politically palatable. Lucas: It's possible. But the politics of any new tax are brutal, especially in a divided Congress. So I wouldn't bet on a clean solution anytime soon. More likely, we'll see a series of stopgap patches — another general fund transfer, maybe a small rate increase tied to some other reform, but nothing structural. Luna: In the meantime, the buying power of the gas tax keeps eroding. Every year it stays at 18.4 cents, the hole gets a little deeper. Lucas: That's the quiet fiscal reality. A tax that was designed to fund roads is now a historical artifact — frozen in 1993, slowly decaying, and waiting for a reckoning that Congress keeps postponing.