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Abstract

The current crisis in highway finance in the United States is mostly driven by greater vehicle fuel efficiency, substantial rises in construction costs and automobile use, and fixed per gallon fuel tax rates that do not increase with inflation. These factors give rise to questions about the adequacy of the gasoline tax (or gas tax) structure to generate sufficient revenue. We argue that the public will be more willing to increase the gas tax if it is restructured to be directly connected to measures of need and is adjusted upward in small, regular increments. We examine how state variable-rate fuel taxes, by incrementally adjusting the gas tax rate on a regular basis, would affect gas tax revenues. This is done by simulating gas tax revenues given different adjustment formulas for the gas tax rate (based on changes in construction costs, general inflation, and improvements in fuel efficiency), and comparing gas tax revenues to determine revenue-generating capacity of variable-rate approaches.

Keywords

transportation finance highway funding gas tax variable-rate gas tax indexed gas tax tax increases

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Improving Revenue Adequacy by Indexing the Gas Tax to Indicators of Need

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