The Option of an Oil Tax to Fund Transportation and Infrastructure

This paper raises key issues associated with using an oil tax to fund U.S. transportation infrastructure, identifies the decisions Congress would need to make in designing such a tax, and outlines some of the likely implications of adopting an oil tax. In 2009, federal spending on surface-transportation infrastructure outpaced federal tax revenues on gasoline and diesel fuel. Increasing fuel efficiency results in less money spent buying fuel, so real revenue generated from these taxes has declined. This paper investigates using a percentage tax on crude oil and imported refined petroleum products consumed in the United States to fund U.S. transportation infrastructure. Such a tax could simplify the tax system by replacing several existing taxes used to finance transportation with a single, upstream tax that could be adjusted automatically to fully fund appropriated expenditures on transportation and transfer external costs associated with producing and consuming oil from the general public to oil producers and consumers. It would spread the burden of these external costs across all users of petroleum products, help fund national security expenditures employed to safeguard sources and sea-lanes used to import oil, and might be more politically palatable than raising existing motor-fuel taxes. The paper provides revenue estimates based on different potential oil tax rates at various oil prices, then matches potential revenues to estimates of transportation expenditure needs. It also estimates the aggregate external costs associated with producing and consuming oil.