Tuesday, October 16, 2007

Not Helpful: Pennies per gallon

Crazy how getting one small detail wrong can lead to such problems. Last night in my transportation finance class, we discussed the federal and state gas taxes.

Problem 1) Taxes are calculated in cents per gallon, so as gas prices rise, the tax collected remains the same. If prices increase enough and drivers choose more fuel-efficient cars or drive less, fewer gallons are purchased and thus fewer taxes are collected. The wear and tear on roads may be reduced, but not enough to make a difference.

At the same time, oil companies make increasing profits because the taxes are a fixed cost, not a variable one. Assume the current $.18/gallon federal tax rate and gasoline that costs $1.00 to produce. The oil company can make a profit of 10% by charging $1.31 for each gallon. In that case, for a total sale of $1.31, the government collects $.18 (13.1%) in taxes, and the oil company makes $.13 (10%) profit.

If the production cost of gasoline is now $3.00 with the same $.18/gallon tax, and the oil company charges $3.53, the government gets $.18 (only 5.1%) and the oil company gets $.35 (10%) profit.

Add in inflation and other increasing costs for road construction and maintenance, and you end up with rapidly shrinking highway and transit funds, plus increased oil company profits.

Problem 2)

In Illinois, More than 50% of state gas taxes are shared with municipalities, counties, and regions, so every level of government is dependent on automobile driving. Not only that, since the revenues are collected based on gallons purchased, there is an incentive to encourage auto-centered development and low gas mileage. Hello strip malls!

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