Muehlegger Talks Fuel Tax for ITS

By Loren Michael Mortimer - With the US Highway Trust Fund teetering on insolvency and lawmakers struggling to find a long-term fix, Assistant Professor of Economics Erich Muehlegger addressed the issue of fuel tax at a recent seminar hosted by the UC Davis Institute of Transportation Studies.

The Highway Trust Fund accounts for 25 percent of all federal highway infrastructure spending and two-thirds of California’s ongoing construction projects. Its revenues depend on federal fuel taxes—18.4 cents per gallon on gasoline and 24.4 cents per gallon on diesel. Since President Bill Clinton oversaw the last fuel tax hike in 1993, politicians of all stripes have been reluctant to increase the federal tax, relying since 2008 on stopgap measures to keep the fund solvent. As congressional leaders have largely exhausted short term fixes to this perennial problem, policymakers must now consider raising fuel taxes or finding alternative sources to keep the fund afloat.

Erich Muehlegger, Assistant Professor of Economics and ISS Executive Committee member, is an expert in fuel tax. Muehlegger’s recent talk at the UC Davis Institute of Transportation Studies (ITS), “Fuel Tax Incidence and Policy”, covered the findings of his three most recent papers in an interdisciplinary forum bringing together community stakeholders, faculty, and students.

While the federal government has not adjusted gas tax rates in more than twenty years, each state has its own fuel tax policy. For an economist like Muehlegger, each state is its own laboratory. Drawing on data reflecting changes in state rates, Muehlegger showed how fuel taxes reliably reduce traffic congestion and greenhouse gas emissions. Because fuel tax fluctuations are reflected in prices at the pump, rate hikes incentivize conservation and the purchase of hybrid vehicles. While consumers may not respond to a short term price increase—caused, for example, by a foreign conflict—a rational or predicable rise like a fuel tax influences consumer choices over the long term.

Muehlegger cautioned, however, that fuel taxes are regressive. Consumers bear the entire burden regardless of their income. And while environmental groups and the construction trades tend to support fuel taxes, policymakers must also consider that working families in rural areas will bear a disproportionate tax burden. (Rural Californians who depend on their pick-up trucks to get to work shoulder more of the costs of a fuel tax than a young urban professional using a bicycle or public transportation.) While Muehlegger’s research shows that fuel taxes can be a precision instrument in policymakers’ toolkits, the demonstrable environmental and economic benefits of fuel tax hikes must be balanced with the hardships they impose on those who can least afford them.

Watch the presentation