Highway funding, which relies on the gas tax, will be hard hit as fuel sales decline

By Robert W. Poole Jr. for the Badger Institute

As people hunker down at home, with few places to go but the grocery store, congestion has all but disappeared from our highways and freeways. Because people aren’t driving much, gasoline sales are projected to decrease by more than half during the pandemic. 

That means revenue from per-gallon gas taxes also will plummet, and that worries state transportation departments, which rely primarily on gas taxes to fund their highway budgets.

How big of a problem could Wisconsin be facing?

Before the COVID-19 crisis, the state Legislative Fiscal Bureau projected the motor fuel tax to generate $1.08 billion in 2019-’20. That’s more than half of the Wisconsin Department of Transportation’s total annual revenue of $1.99 billion. 

In March, April and May of 2019, the state collected $84 million, $82 million and $85 million in gas taxes, respectively, according to the Wisconsin Department of Revenue. Assuming gas sales decrease by half this March and April and by 20% in May, that would mean a $100 million deficit in Wisconsin’s transportation budget. If the slowdown continues into the summer, when revenues typically rise, it could be disastrous. 

A better way to fund roads

The per-gallon gas tax had its centennial last year, having been invented by Oregon in 1919. But instead of celebrating its longevity, we should be planning its funeral. Here’s why:

Like most developed countries, our federal government has policies that will doom gas-tax revenues over the next several decades. 

Newly announced federal standards require new cars to get an average of 47 mpg by 2025. As fuel-stingy new cars replace gas-guzzling old cars over a decade or two, the amount of gas sold will be in a long-term decline. Moreover, the world’s automakers are devoting major R&D spending to practical, affordable electric cars that use no gas at all.

Ed Regan of transportation consultants CDM Smith has projected the likely decline in gasoline sales — and federal and state gas-tax revenues. Using the Energy Information Agency’s reasonable projection of future mpg standards, by 2050 total federal and state gas-tax revenues would be $39 billion per year less than with unchanged mpg. Adding a fairly aggressive projection of electric vehicle sales (from Bloomberg New Energy Ventures), by 2050 the annual shortfall would be over $50 billion.

Forecasts like these have led many to conclude that we need to replace the per-gallon tax with another way to fund our roads. A national commission in 2009 reviewed more than a dozen options and concluded that the best alternative is charging per mile driven rather than per gallon consumed. 

Over the past decade, Congress has offered states modest grants to test per-mile charges, and more than a dozen pilot projects have been carried out. The projects simulate a per-mile charge of 1.5 to 2 cents per mile, enough to replace a state’s gas tax. They also offer motorists alternative ways to have their total miles reported, including annual odometer readings or an on-board gadget that simply accumulates miles driven (not where or when) and uploads the totals periodically.

The transition could begin on Interstates that are being widened or rebuilt. Transponders or license-plate reading could determine the number of miles traveled and could calculate the gallons of gas used. The new charge would be a replacement for the gas tax, not in addition to it. This policy is already in place on the New York State Thruway, where truckers receive rebates on fuel taxes on this tolled Interstate.

Before another crisis hits and gas-tax revenues shrink further, the Wisconsin Department of Transportation should start addressing the need to replace the state gas tax. The future of the state’s highways is at stake.

Robert W. Pool Jr. is director of transportation policy at Reason Foundation and a Badger Institute visiting fellow.