Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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Roads and the Gasoline Tax

There’s been concern in Indiana about paying for road maintenance and construction. Candidates and legislators are looking for new sources of revenue. Maybe you wonder:  What about the “good old” gasoline tax?  It’s the biggest of the motor fuel taxes, and those taxes have always paid for Indiana’s state and local road spending.

The good old gasoline tax just isn’t what it used to be, because people aren’t buying as much gasoline as they used to.

We can estimate the number of gallons of gasoline sold in Indiana just by dividing gasoline tax revenue by the tax rate.  In fiscal year 2011, the state collected $543 million from the gas tax at 18 cents a gallon. That’s just over 3 billion gallons of gasoline. 

That’s a lot of gallons, but sales in 2007 were 3.2 billion gallons. Sales dropped 5 percent in four years.

The recession started at the end of 2007, and recessions always reduce gasoline sales. People lose their jobs and must economize on driving. Business travel falls off. But expansions come after recessions, and expansions usually increase gasoline sales.

In the expansion of the 1980s, gallons increased from 2.3 billion in 1982 to 2.7 billion in 1990.  In the expansion of the 1990s, gallons increased from 2.6 billion in 1992 to 3.3 billion in 2001.  But during the 2000s, gasoline sales didn’t grow. They decreased a little, from 3.3 billion gallons to 3.2 billion.

During the 2000s, Indiana population grew and road maintenance costs grew, but gasoline tax revenue fell. As they say on Mythbusters, “Well, there’s your problem.”

Why aren’t people buying gasoline? Here are three reasons:

• Cars are more fuel-efficient. According to the U.S. Energy Information Administration’s Annual Energy Review, the average fuel efficiency of light vehicles rose 6 percent between 2001 and 2010, from 22.1 to 23.5 miles per gallon. That’s a pretty big saving when spread over millions of cars. Still, fuel efficiency increased more during the 1980s, and back then gallons increased. Fuel efficiency accounts for just a small part of the gasoline sales drop in the 2000s. 

• Gasoline prices increased. Drivers are notoriously slow to cut their gasoline use when the price goes up. In Indiana, a 10 percent rise in gas prices above inflation results in just a 1 percent drop in gasoline sales. But the Energy Information Administration reminds us that gasoline averaged $1.51 a gallon in 2001. By 2010 it was $2.61. (It’s higher now. I’ll bet you’ve noticed.) Even with a small response from drivers, a price increase that big will cut gasoline sales. Prices adjusted for inflation dropped in the 1980s and 1990’, and sales increased. The price hike is a big reason for the sales drop in the 2000s.

• Then there’s income.  Indiana income growth during the 2000s recovery was pretty sluggish.  Income adjusted for inflation grew 1.2 percent per year on average from 2001 to 2007. Growth was 3 percent per year during the 1980s and 2.8 percent per year during the 1990s. The whole Great Lakes region grew slowly during the 2000s, partly because of manufacturing job losses. If income had grown in the 2000s like it had in earlier expansions, gasoline sales would have increased.

What’s the outlook for gasoline tax revenue? Income growth may recover. That would be a plus.  Gasoline prices may not increase, but rising world demand probably means they won’t fall. Fuel efficiency will only increase, maybe faster in the future than in the past. Gasoline sales may grow with the recovery, but high prices and rising fuel efficiency will keep growth slow. That means gasoline tax revenue isn’t likely to recover its previous growth rates. 

What can we do? We could shift money from other state programs to roads. We could raise the gasoline tax rate. We could create new road tax options for local governments. We could find other ways to pay for roads, like tolls or long-term leases of state assets. We could even convert some rural roads back to gravel to reduce costs.  I can imagine pretty stiff opposition to all of these policies.

But Indiana’s new governor and Legislature will find the road funding problem on their desks when they move in. Ladies and gentlemen, welcome to the Statehouse.



Writer: Larry DeBoer
Editor: Cindie Gosnell