Replacing Gas Tax with Crude Oil Tax Could Fund Nation's Transportation Needs

The federal government could fully fund its surface transportation infrastructure needs by levying a percentage tax on crude oil and imported refined petroleum products, according to a new RAND Corporation paper.

A tax on crude oil is one of several options that RAND has been examining to replace the existing federal gasoline and diesel taxes.

Researchers found that by replacing taxes at the gas pump with a percentage tax on oil, the tax burden would be spread across all users of petroleum products, not just motorists and truckers.

The oil tax would also replace several taxes on fuels with one tax, and could be adjusted automatically to fund transportation expenditures, researchers found. It would account for inflation, something that has eroded the value of existing fuel taxes. The oil tax could also help fund national security needs to safeguard oil sources and sea-lanes used to import oil.

The federal gasoline and diesel taxes that American drivers pay each year fall short of generating enough revenue to cover the costs of building new roads and maintaining the transportation system they are intended to fund. Gas and diesel taxes have not been raised since 1993.

"The federal Highway Trust Fund took in $36 billion but had $49 billion in expenditures in 2008," said Keith Crane, the report's lead author and director of RAND's Environment, Energy and Economic Development program. "Over the next six years, the federal government estimates it will need $83 billion annually for ground highway and transit infrastructure."

Researchers cite failed efforts to raise taxes at the pump, along with improved vehicle fuel economy, as two key reasons gas and diesel taxes will not fully underwrite needed transportation projects.

"There is strong opposition in Congress to raising any taxes right now," Crane said. "But the federal gas tax has not been raised in more than 18 years. There is a clear shortfall in meeting the nation's surface transportation needs, and our research indicates a crude oil tax can close that gap."

According to the RAND paper, the tax rate on crude oil and imported refined petroleum products would depend on the price of oil. For example: the rate would change from 10 percent at $120 barrel, to 17 percent at $72 a barrel, and 34 percent at $40 a barrel to generate the same amount of revenue.

The tax would be collected at refineries, and the rate could be adjusted quarterly to account for changes in the price of oil. Motorists and truckers would pay modest increases in total taxes.

Homeowners who heat their homes with fuel oil would pay federal taxes on fuel oil where they had paid none before. Low-income earners and those in the north and northeast would likely be more affected than higher-income earners or those living in moderate climates, researchers said.

The paper, "The Option of an Oil Tax to Fund Transportation and Infrastructure," is part of the RAND Corporation's Occasional Paper series, and can be found at www.rand.org.

The research was conducted in the Environment, Energy, and Economic Development Program within RAND Infrastructure, Safety, and Environment. It was funded from the Investment in People and Ideas program, supported in part by RAND donors and by fees earned on client-funded research.