Tying the Gas Tax to Inflation: Not a Good Idea

Recently, oil industry insiders have stated that gas prices throughout the country are going to drop as low as $2.50 a gallon due to a drop in demand and high supply.

Surely this is good news for drivers in the short run, but if the federal government continues to block domestic production, we will see prices continue on an upward trend.

What makes these future price increases worse is that a significant portion of what people pay for gas is taxes. The federal gasoline tax is 18.4 cents per gallon and the average state gas tax is 26 cents per gallon. Even worse, politicians in most states vote to increase the tax every single year.

However, some states have a particularly bad policy that increases gasoline taxes without politicians even having to take responsibility. In Maine, Nebraska, North Carolina and Wisconsin, the state gas tax increases with inflation. So when the CPI goes up, so does the tax on gas.

If you think about this for a second, this is particularly dangerous for a couple of reasons.

First, politicians no longer have to explain to their constituents why their gas taxes have increased. There is no vote, so there is no longer accountability. Politicians can now count on more of our money with less of our consent. Since there is no accountability, it is no surprise that all of these states have gas taxes that are above the national average.

Second, and probably even worse, the price of gasoline is included in the calculation of the CPI. So as the price of gas goes up, this creates upward pressure on the CPI. In turn, this increases the gas taxes in these states. So citizens in these states are hit even harder by gas price increases.

The counter to this argument says that states need to adopt this policy because this tax pays for roads and road repairs become increasingly expensive as time goes on.

If that were the case, we should see that those states with an indexed gas tax would have better roads. More money for roads means better roads, right?

Not necessarily. According to an annual Reason Foundation study on the quality of our states’ roads, only Nebraska ranks in the top ten and Maine ranks a dismal 32nd in 2008. Even better, North Dakota, which has only raised its gas tax once in the past decade, has the best roads in the country.

So policymakers should be weary of claims that indexing the gas tax is the solution to the states' crumbling roads. Taxpayers are paying higher and higher prices for roads that are not necessarily any better. It is clearly the case that more money is not necessarily the solution. Perhaps these states that are flirting with enacting this policy should first look to states with good roads to see what they can learn. Families cannot afford to keep paying a higher and higher price for poor quality roads.