Understanding the gas tax through math

Here is the first follow up blog on the gas tax increase in Minnesota that recently passed and survived a veto.

Throughout this blog, I am using historical data from the Energy Information Administration which is part of the Department of Energy. Now because I am lazy, I am going with what I found in a quick search. This is weekly averages over the Midwest starting May 11, 1992 through March 10, 2008. This average is over multiple states, who may or may not have a higher state gas tax than Minnesota, so it is far from the perfect data set, but it will still serve to explain the gas tax as part of the cost of gasoline.

First we shall look at the state gas tax as a percent of the total cost of a gallon of gas. You may have recalled in a previous post I had quoted a letter by Al Sands,

Why are gas taxes pegged at cents per gallon, instead of a percentage of the retail price of a gallon? Most taxes are based on dollars: the sales tax, the income tax, the property tax. Pegging the gas tax on gallons dooms it to constant underfunding. Maintenance costs go up every year.

The point Sands is making, is that the state gets the same amount of money per gallon of gas, regardless of the increase in costs.

So looking at the data between May 11, 1992 and December 27, 1999 the range of the gas prices was from $0.853 and $1.266, I know it makes me cry to see how long these prices were relatively stable and lower. So looking at the maximum and minimum, a 20 cent gas tax would take between 23.4% or 15.8% of the price of gas during this time period.

Today, with the gas price at $3.187 the gas tax at 20 cents per gallon is only 6.3% of the price of gas. Going back to Sands question, if we had maintained the gas tax at a percent of the price of gas, like the sales tax, then the gas tax at 15.8% would capture 50.4 cents per gallon when gas costs $3.187, far less than the 28.5 cents it will be at after the phased in increases.

The next way to see how 20 years of a stable gas tax, not tied to inflation, but volume, has lessened its purchasing power is to look at inflation. Using the calculator on Federal Reserve Bank of Minneapolis web site we find this,

  • $.20 in 1988 adjusted for inflation equals $.36 in 2008, or

Once again, the gas tax increase we are talking about, will still be less in inflation adjusted dollars than the amount in 1988.

Now you may have remembered this part of the letters I quoted, this one from Richard Meixner,

The price of gasoline isn’t high enough already, so our legislators are going to make it even more expensive.

So for our history lesson.

  • On May 18, 2005 the Senate passed a bill that would raise the gas tax by 10 cents per gallon.  Governor Pawlenty vetoed either that day, or the following day, May 19, 2005.  The price of a gallon of gas on May 16, 2005 was $2.06.
  • On May 15, 2007, Governor Pawlenty signed a veto of the transportation bill that would have raised the gas tax by 7.5 cents per gallon.  The price of a gallon of gas was at historic highs on May 14, 2007 at $3.158.
  • On February 22, 2008, Governor Pawlenty vetoed the transportation bill that would have raised the gas tax by 8.5 cents per gallon.  The price of a gallon of gas on February 18, 2008 was $3.041.  Of note, the price of a gas of gasoline went up by 10.1 cents per gallon from a week earlier.

When does Meixner expect the gas tax to go back down?  Why isn’t he mad that the increase didn’t come when the gas was closer to $2 a gallon?
At this point your eyes may be glazing over at all these numbers and what they mean to car owners and Minnesota residents, so I will summarize some things for you.

Unless you are looking at absolute dollars, the actual dollars captured in revenue, which have increased (more people, more driving, less efficient vehicles), we are getting less bang for the buck.  The percentage of the price of a gallon of gas that is paid to state taxes has gone down.  Also the value of the gas tax at 20 cents per gallon has diminished due to inflation, to keep up with inflation, the 20 cents in 1988 would now be 36 cents in 2008.

Governor Pawlenty has his opportunity to raise the tax in 2005 when the cost was close to $2 per gallon, instead he vetoed, then he used the much higher prices as the reason against raising it in 2007 and 2008.

At what point in time does  he think the price of gas will go down significantly?  At what point will he think that funding is inadequate enough to warrant an increase?  Does he really think that Wimpy’s pay you Tuesday for a hamburger today is the proper way to fund large scale transportation projects, which had no takers.

With the MN Department of Transportation building falling down, with I-35W bridge having collapsed.  With potholes on highways and city streets leading us down the road to challenge Manitoba for the label Land of 100,000 Lakes.  The state legislature, including the crucial six House Republicans voted to override Governor Pawlenty’s veto, which Minnesotans, and especially the suspension and wheel alignment in our cars, will benefit from it.

-Josh

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2 Comments

  1. Adam said,

    August 19, 2008 at 12:31 pm

    I am kinda lost here, is Josh saying that the I35 bridge would not have fell down if there was a 10 cent per gallon increase on gas? I would like to see the data to support that position….Kinda like using 9/11 as a argument to goto war with Iraq?

    Or saying 55 MPH saves lives…..4 dollar a gallon gas saves more lives.

  2. Josh said,

    August 19, 2008 at 12:52 pm

    I am not sure where I said that lack of an increase caused the collapse, could you find the quote from on that?

    I started with Mr. Sand premise of tying the gas tax not at a per gallon fixed amount, but as a percentage of the cost of a gallon.

    Then I went on to look at Mr. Meixner’s complaint, and Governor Pawlenty’s justification for vetoing the the increases, the high price of gas.

    Finally, I gave examples of the infrastructure problems we are facing as a state, including the bridge collapse and talk about how I applaud the override of the veto to inject more money into the DOT budget.

    And if you go to another of my blogs, you see where I highlight road or bridge improvements that have had their schedule moved up because of increased funding from this bill.

    https://endtheecho.wordpress.com/2008/06/29/what-can-taxes-do/


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