What if: gas taxes were always a percentage

Currently, the price of gas in the District of Columbia includes 18.4¢ in federal tax and 23.5¢ in local taxes. As many have noted, the rising per-gallon price of gas has reduced the purchasing power of excise taxes on gas, particularly as the rising price finally is inducing some price elasticity (i.e., more efficient cars and a switch to untaxed fuels like ethanol or electricity). Some have advocated that instead, the tax should be levied as a sales tax, or a percentage of the price.

Indexing gas taxes to the historic price of gas (as converting the tax to a percentage tax would do) makes the inflation-adjusted decline in gas taxes even more stark. It appears that retail prices were around 19¢/gallon in the 1930s, when 4-5¢ state gas taxes were in effect around here, plus the 1¢ federal tax; that implies that there was the equivalent of a 41% sales tax on gas during the nation’s deepest-ever economic depression. An equivalent tax on today’s typical DC gas price of $3.60 (of which $0.419 is tax) would result in a tax of $1.30/gallon and a “new” gas price of $4.48. To get back to such rates would require an 88¢ increase in the gas tax — not far off from Tom Friedman’s 2003 proposal for a $1/gallon, $110B-in-revenue “Patriot Tax.”

Of course, had gas taxes always been levied at these rates, prices would have been higher earlier, demand would thus be lower today, and the resulting prices would probably also be lower. Strange how that works.

[comment added to Matt Johnson’s post at GGW; the original post has the real and nominal gas tax rates in DC, Md., and Va. He also points out that cutting all of the “extraneous” pedestrian and bicycle programs from the USDOT budget would recover a tiny fraction of the money that could be raised by indexing the gas tax appropriately.]