Gas tax increases?

THE POOR state of repair of highway bridges in Illinois has prompted Sen. Stanley B. Weaver (R., Urbana), assistant minority leader, to introduce legislation to increase the state motor fuel tax by 3.0 cents per gallon. Weaver's bill (Senate Bill 292) would raise the tax on gasoline, diesel and LPG (liquid petroleum) motor fuels to 10.5 cents per gallon, 40 per cent higher than the current rate of 7.5 cents per gallon, for a seven-year period beginning October 1, 1977. The new revenues generated by this measure would be earmarked for bridge repair and construction.

Based on estimates provided by the Illinois Department of Transportation, a Senate Transportation Committee staff report for S.B. 292 indicates that nearly $1,500 million in 1976 dollars is needed for bridge improvements throughout the state. A straight-line projection, also provided in the Transportation Committee report, indicates that the 3.0 cent per gallon hike will produce about $165 million in new revenues annually or $1,155 million over the seven-year lifetime of the tax increase. (Additional revenues needed to meet the full costs of bridge repairs would presumably come from sources of revenue other than the motor fuel tax increase.)

In the past, straight-line estimates of this kind have usually underestimated new revenue from an increase in motor fuel taxes because of steady growth in the number of motor vehicles on the highway and in the corresponding demand for gasoline. Recent federal legislation, the Energy Policy Conservation Act of 1975, however, requires automobile manufacturers to make steady improvements in the fuel economy of new cars through 1985. As new, more efficient, model cars replace less efficient vehicles, the fuel demands for the entire automobile population will eventually begin to decline. As gasoline consumption declines motor fuel tax revenues will also decline.

The table contains projections of motor fuel tax collections reflecting legislated improvements in automobile fuel economy through 1984. These projections assume a modest annual rate of growth of about 2 per cent in the demand for travel by gasoline powered vehicles in Illinois and a 6.4 per cent rate of growth in the demand for diesel fuel, which is the average rate of growth in Illinois for the last five years. The first projection in the table shows what tax revenues will be if the current tax rate is maintained. The second projection indicates the net increase in tax revenues if the 3.0 cent per gallon state motor fuel tax increase is enacted.

A 40 per cent increase in the state tax would result in somewhat less than a 40 per cent increase in revenues because as the price of gasoline increases some motorists will cut back on gasoline consumption. Recent estimates of the reduction in gasoline consumption that would occur in response to a price increase indicate that each 1 per cent increase in price will induce a 0.4 per cent reduction in gasoline purchases. A 3.0 cent per gallon increase would raise the current retail price of gasoline of about 60 cents by 5 per cent and reduce gasoline purchases by about 2 per cent.

Projected state motor fuel tax revenues, October 1, 1977, to September 30, 1984 (million dollars)

Year	Total state revenues with no increase in gasoline prices	Additional state revenues from 3.0 cent per gallon state motor fuel tax increase
		Without federal tax increase	With new federal tax on crude oil	With both new federal tax on crude oil plus increase in federal motor fuel tax
1977	105.6*	39.2*	34.1*	34.1*
1978	426.5	158.3	137.9	137.9
1979	430.8	159.9	139.2	118.5
1980	431.7	160.2	139.5	118.7
1981	430.1	159.6	139.0	118.3
1982	425.6	157.9	137.5	117.0
1983	420.5	156.1	135.9	115.7
1984	311.3**	115.5**	100.5**	85.6**
TOTAL:	2982.1	1106.7	963.6	845.8

Three month period, October 1, 1977, to December 1, 1977.
** Nine month period. January 1, 1984, to September 30, 1984.

In his recent energy message to Congress President Carter proposed two energy conservation measures which, if enacted, would increase the price of gasoline and further erode the revenue-generating ability of a state motor fuel tax increase. The President asked Congress to place a tax on crude oil which may ultimately increase the price of gasoline by 5 to 7 cents per gallon. In addition, President Carter requested standby authority to increase the federal gasoline tax in annual increments of 5 cents per gallon beginning in 1979. The third projection in the table shows the effect that a tax on crude oil may have on new state motor fuel tax revenues. The fourth projection indicates the combined impact that a single increase in the federal motor fuel tax plus a tax on crude oil may have on new state motor fuel tax revenues.

Finally, the estimated effects of higher taxes on gasoline sales do not account for any decline in sales that may result from motorists filling their tanks in neighboring states. At present, the Illinois tax is about the same as taxes in neighboring states: Wisconsin, 7.0; Iowa, 7.0; Missouri, 7.0; Kentucky, 9.0; and Indiana, 8.0 cents per gallon. With a 3.0 cent per gallon tax hike, the Illinois tax will be greater than that in neighboring states and may encourage motorists to cross state lines when buying gas.

In conclusion, the projections of new tax revenues in the table are less than Sen. Weaver's straight-line estimate. Although the projection of additional revenues from a 3.0 cent per gallon tax increase approaches $1,155 million, it does indicate the dampening effect that new federal fuel economy standards will have on motor fuel tax collections. The projections of revenues for the two combined state-federal tax increases come to only 85 and 75 per cent, respectively, of Weaver's estimate and raise the prospect that the senator's attempt to raise money for bridge repairs and President Carter's attempt to reduce gasoline consumption will work at cross purposes. 

20 / June 1977 / Illinois Issues

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