3 Effects of a State Gas-Tax Increase

Analysis finds additional revenue, minimal economic pain with tax increase

By 
Samantha Oller, Senior Editor/Fuels, CSP

MUNCIE, Ind. -- Think increasing a state’s gas tax would be an economic negative? Not necessarily—and with gas prices so low, now is the perfect time, according to a recent analysis.

Excise gas taxes in states such as Indiana go toward transportation infrastructure improvements and maintenance. Inflation has eroded the financial might of gasoline taxes, whether state or federal, while construction costs continue to grow. Since the late 1990s, the per-mile cost of road maintenance has risen about 22%. 

Meanwhile, improved fuel efficiency has cut the amount of gasoline consumed and the amount of revenues raised by gas taxes. This factor alone has halved the cost of driving 100 miles compared to the 1930s.

In a policy brief, Gasoline Taxes: Some History & Analysis (see link below), Michael J. Hicks, director of the Center for Business and Economic Research (CBER) at Ball State University, Muncie, Ind., analyzed what effect a theoretical 5-cent-per-gallon (CPG) increase in Indiana’s state excise tax would have on economic growth. His conclusion: It would have “no appreciable impact on key measures of employment or GDP [gross domestic product] in Indiana." Instead, it would:

1. Generate about $157 million each year in additional revenue. Hicks assumed that all of the revenue would go toward infrastructure construction and maintenance. While a higher tax would lower employment, Hicks found that the increased spending on infrastructure would increase it, specifically in the construction industry.

2.  Result in a “very small” loss in retail gasoline sales. Hicks points to previous research showing that a 1% increase in the state gasoline tax rate results in a 0.03% drop in consumption. Because the nearby states of Illinois and Michigan have higher gas-tax rates, while Ohio’s tax is similar in size to Indiana and Kentucky’s is lower, any loss of sales across the border would be minimal.

“A 5-cent increase in gasoline excise taxes will not change the relative position of Indiana gas taxes with any neighboring state,” Hicks concluded.

Businesses and residents do not necessarily view higher tax rates negatively. The key, said Hicks, is that the higher taxes lead to better or more public services. “The problem with higher taxes is not the tax themselves but any absence in improvement in public goods or services associated with them,” he said.

3. Improve gross domestic product (GDP) and employment marginally. Hicks found that the net effect of a 5-CPG gas-tax increase from 2016 to 2025 would be greatest in the short term. The first year would increase GDP by about $24 million and job growth by around 450 workers, both in the construction industry. The positive effect would decline over the nine years. By 2025, GDP increases would slow to about $17 million annually, with additional employment of around 100 workers. (The GDP estimate does not reflect the economic effect of better maintained infrastructure or an improved quality of life.)

“The most tractable conclusion from this simulation is that at this time, a 5-cent gasoline excise-tax increase will have no noticeable impact on either employment or GDP,” Hicks said. “While these numbers are positive, they are so small as to be unrecognizable against a state with 3.4 million workers and GDP in excess of $300 billion per year.”

All these factors suggest the timing for a state gas-tax increase is almost perfect.

“If there is a long-term need to increase gasoline taxes to pay for infrastructure maintenance and construction, the current low prices, increasing fuel efficiency and long-term decline in real tax revenues suggest this is a good time to enact such an increase,” Hicks said.