May 8, 2008
Fuel taxes have recently become a hot topic in the presidential campaign and in the media. Everyone has an angle on this issue. Environmentalists worry about the effect of gas consumption on the environment and want to use the tax to change consumers' behavior; motorists express outrage at the price they have to pay to fill up their tanks and demand tax relief; presidential candidates focus on the impact of the tax on the "middle class," and some politicians tell constituents and voters that government intervention is the only solution; some policymakers and media claim that big oil companies aren't paying their fair share and demand windfall profits taxes; and, finally, economists ask, What is the purpose of this tax, anyway?
The purpose of the gas tax is simple: to raise revenue for building and maintaining roads and related infrastructure. This approach conforms to what economists call the "benefit principle" of taxation, which stipulates that consumers of government services should pay in proportion to the benefit they obtain from those services. It follows that the revenue raised from a tax that adheres to the benefit principle should be used solely to provide the good or service on which the tax is levied. Therefore, if gas taxes are paid by the individuals who benefit most from roads (drivers) and if the revenue is used solely for road building and maintenance, then the tax is a good one.
However, there is also the question of whether gas taxes should be used to decrease fuel consumption in order to protect the environment and reduce pollution. Pigouvian taxes, named after Arthur C. Pigou, a renowned English economist from the early 20th century, are taxes that attempt to make up for undesirable side effects of certain industries—what economists call "negative externalities." Pigouvian taxes are controversial and often difficult to calculate; they complicate the gas tax debate considerably.
A number of Tax Foundation publications and blog posts can help clarify the issue. Tax Foundation President Scott Hodge's Tax Gouging at the Pump and Record Taxes Paid before Record Oil Profits explain that oil companies actually pay more in taxes than they earn in profits, contrary to some people's notion that "greedy" oil companies are raking in huge profits without paying their fair share of taxes. The Tax Foundation Background Paper Paying at the Pump: Gasoline Taxes in America provides an in-depth look at the history and use of gas taxes (send us an e-mail if you'd like a free hard copy). The Fiscal Fact Questions to Ask before Raising the Federal Gas Tax presents a concise discussion of the role of fuel taxes. The Distributional Impact of Windfall Profits Taxes and a Gas Tax Holiday shows how much money taxpayers in each income group stand to gain or lose under the gas tax proposals put forth by the presidential candidates.
In addition, the Tax Data section of our website contains a section on gas tax charts, which includes the following:
Click here for more Tax Foundation studies and blog posts on gas taxes.