Analysis yields gasoline tax insight

At 28.5 cents per gallon, the Minnesota gas tax is at its highest level ever, yet some politicians, mostly Democrats, and some business and farm groups want to raise it. Nearly all Republicans oppose any increase, with the leaders vowing to “not go back to taxpayers” for more money. Some business groups want more state spending but not from a higher gas tax revenue. Who is right?

To an economist, the answer would depend in great part on the return to society as a whole from the spending on transportation infrastructure that would be funded with higher fuel tax revenue. Compare that to the return to society if the money were left in consumers’ pockets and you have an objective answer.

Unfortunately, there is no way economists can precisely measure this in the real world. Thus, as for most other economic issues, we have to depend on the subjective valuations of citizens that get expressed through the political process.

Economists can, however, help put raw numbers, like $0.285 per gallon, in a broader context that may foster a better-informed public debate. The absolute level of some variable, whether it be a gas tax, an unemployment rate, a budget deficit or the money supply, seldom carries much meaning by itself. It has to be put in a relative context.

Take, for example, the 3.7 percent unemployment rate reported for Minnesota in November. Is that good or bad? By itself, that is hard to answer, particularly if you are not an old geezer like me who has lived through multiple business cycles.

However, if you add the information that this rate is 2 percentage points below the national average, that it is lower than 45 other states and that it is the lowest in 13 years, it seems clearer that this is a desirable situation for most people.

So let’s try to put the current gas tax in context. Unlike the unemployment rate, it is a monetary amount, and the question of inflation applies. When looking at virtually any price that changes over time, it helps to know how big any changes were relative to the general price level.

As opponents of any gas tax increase point out, the tax has been incremented up again and again over 90 years since it was first instituted in Minnesota. From the initial level of 2 cents per gallon, there have been 12 increases to the current level, which is nowsome 14 times as high. So the Legislature has “gone back to taxpayers” again and again. (This counts the most recent 3.5 cent increase, phased in from 2009 through 2013, as one bump.)

But the general price level also has ratcheted up. The Consumer Price Index shows that the general price level is about 13.5 times as high now as back then. In “real,” or inflation-adjusted terms, the current tax was about a penny and a half a gallon higher in 2014 buying power than it was in 1925.

The 2 cent tax didn’t last long, however. There was a 50 percent jump after only four years and another 33 percent hike eight years after that. (In other words it went to 3 cents in 1929 and to four cents in 1937.)

This is a case of a “time-series” where a chart is helpful. Once plotted in a simple graph, it is easy to see that, adjusted for inflation, the current tax level is lower than in the large majority of the years it has existed and that it is much lower than for many of those years.

Do some sorting in a spreadsheet, and it turns out that in inflation-adjusted terms, the tax was lower than now in 16 of the years since 1925 but higher in 73. It was at least 50 percent higher in 33 years and twice as high in eight.

Adjusting for inflation adds useful information, but there are other things to consider. What, for example, is the level of the tax relative to income? That is an important question for any family with a car.

Good data on per capita income does not go back as far as the CPI does. So we cannot make this tabulation until 1929. Data on the actual amounts of tax revenue generated by the gas tax exist, but are not easily available. Changes in the age structure of the population, the average number of adults and cars in a household, average number of miles driven and average gas mileage achieved all are complications in looking at this factor.

One simple approach is to take an arbitrary, but plausible, amount of gasoline that a typical household might buy in a year and compare that to per capita income. Doing that shows that the current tax rate imposes a tax burden that has fallen markedly over time.

The tax on 500 gallons of gas would have eaten up 2.5 percent of average per-capita personal income in 1929 versus only 0.3 percent in 2014. The bite of the tax on income was higher than now in 77 out of the 85 years for which data is available. The relative proportion of this bite was at least twice as high in 49 years and at least 10 times as high in 11 of them.

The fact that the current level of the tax is in the low end of the historical ranges of both inflation-adjusted levels and as a proportion of income is not, in itself, justification for any increase. But it does tell us that Minnesota voters and taxpayers over past decades were willing to support relatively higher levels of gas taxes than prevail now.

One could also look at the revenue generated by the gas tax relative to the costs of road and bridge construction and maintenance. There are various “construction cost indexes,” available, though it is hard to find ones that are consistent back over decades the way the CPI and the per-capita personal income series are. Generally, these costs have risen somewhat faster than the general price level. The indexes that are specific to roads are quite sensitive to the cost of fuel, since that is a major factor in earthmoving and paving. And then there is the question of the quantity of such work actually needed on a year-by-year basis.

Friends who are engineers tell me that, in recent years, for the first time in our state’s history, the value of the public capital in transportation infrastructure is falling. That is, we are not building new as fast as old wears out. Putting an exact dollar figure on the decline in condition of a road infrastructure as large and complex as ours would be a historic exercise in engineering economics and cost accounting. But the engineers have good back-of-the-envelope calculations to support their claim. Thus, while this may be a somewhat subjective judgment on their part, I think it correct. That matches with what I see as I drive around the state, often on roads I have traversed for 48 years.

Citizens, voters and legislators have to make up their own minds about whether this tax should be increased.

I think it would be good to return at least part-way to the relative levels that prevailed when my mother or grandparents were paying it and were driving on a steadily improving road network and I would be glad to pay more to make that happen. But my generation clearly is reluctant to pay more in taxes.