A Wholesale Tax on Gasoline: What are the Policy Implications?

Senator Barbara Boxer made headlines, at least in the small transportation world, when she said that she was leaning towards the idea of getting rid of the gas tax and replacing it with “a sales fee.” She further clarified by indicating that this could be “a percentage highway fee that is paid for at the refinery level.” Given that Senator Boxer (D-CA) is Chair of the Senate Environment and Public Works Committee (EPW), the committee in the U.S. Senate that authorizes all federal highway spending, her ideas matter. While the Senate Finance Committee would ultimately need to approve such a change, not to mention the full Senate and the House of Representatives, any idea has to start somewhere and this is a very good place to start.

Senator Boxer’s suggestion implies a percentage-based ad valorem tax on gasoline that is assessed at the wholesale level instead of the current per gallon excise tax. This is very much in line with the direction some states have been taking recently. Virginia and the District of Columbia both replaced their per-gallon gas tax with a wholesale sales tax on gasoline. Connecticut added a wholesale gasoline sales tax to its existing per-gallon tax. The appeal of such a tax is that as a percentage tax it will track better with costs and inflation. The fact that it is a wholesale tax also seems to have some political viability, perhaps because it is not seen as directly impacting consumers like a gas tax.

Transportation stakeholders and infrastructure advocates – and Senator Boxer is likely included in this group – tend to be relatively agnostic about taxation methods for infrastructure. Given the funding challenges faced by the federal program for what seems like forever now, many stakeholders are unlikely to quibble about details of any new mechanism. If a new taxation method can pass and it addresses the funding problem at all, they are likely to favor it.

However, different taxation methods have different tradeoffs because the method of taxation has implications across important policy issues such as the sustainability of the funding stream, the effect of the tax on user behavior, and the effect of the tax on how the money is spent. In weighing preferences between potential solutions to the transportation funding crisis at the federal level, it is important to understand these tradeoffs. Below is a comparison of some of the tradeoffs between a wholesale ad valorem tax on gasoline and our current per gallon tax.

  • An ad valorem tax is more likely to keep up with inflation.

The per-gallon tax on gasoline suffers from a serious problem – we need elected officials to increase it periodically in order to maintain its purchasing power. This was true even when Vehicle-Miles-Travelled (VMT) was increasing nationally. The primary advantage of an ad valorem tax on gasoline is that as the price of gasoline rises, as it is predicted to do over time, so does the amount of revenue from taxation. In theory, this will provide sufficient growth to maintain and improve the nation’s transportation infrastructure.

However, oil is a global commodity, the price of which is volatile and dependent on numerous factors including regional stability and relationships, wars, environmental regulations in countries worldwide, and speculation. While it may track with inflation, it also may not. This is why the Carnegie Endowment thoughtfully recommended in Road to Recovery: Transforming America’s Transportation that a wholesale ad valorem tax on oil (not gasoline) should be accompanied by protections that prevent the tax from potentially gouging consumers or, if the price of oil drops, providing insufficient revenues for infrastructure investment. Any proposal to move to an ad valorem gasoline tax should re-examine this idea from Carnegie, which was endorsed by Tom Ridge, Bill Bradley, and David Walker. 

  • A wholesale tax is less transparent.

Ask any American on the street the rate of the federal gas tax and you are likely to get a blank stare or an incorrect answer. State gas tax rates are similarly unknown. This blissful ignorance is partially due to the fact that few government officials wish to publicize the existence of the tax in the first place. Unfortunately, this lack of transparency also has negative consequences. For one, it often leaves people believing they are paying more than they actually are in reality. This results in a distorted view of how much they are getting for their tax contributions, since they have no idea how much they are contributing.

Another problem is that because people have no idea what they are paying in gas taxes, these so-called “user-fees” have limited impacts on behavior or purchasing decisions. One potential purpose of a user-fee is to manage demand. Gasoline has negative externalities, such as pollutants and congestion, which could be better managed if taxes were simply more transparent. For example, when Oregon experimented with a revenue-neutral fee based on VMT instead of gasoline, participants in the pilot changed their driving behavior in large part because they had better information.

Any wholesale tax would be even less transparent because, even if they wanted to, people would have trouble calculating how much of it they are paying. Wholesale taxes can be passed on to consumers, but they do not have to be. Transitioning to a wholesale tax runs the risk of exacerbating our current disconnect between the average citizen’s taxes and the subsequent investments in our transportation infrastructure. It also essentially gives up on the idea of managing demand through a user fee. Of course, the idea has been dormant in practice for some time, but this transition would essentially end this possibility.

  • An ad valorem tax has greater potential fallout from coming changes.

The litany of changes that are the cause of declining revenues to the Highway Trust Fund (HTF) can be, and often are, recited by virtually any transportation expert, lobbyist, or legislator. VMT nationally has stopped growing, cars are becoming more fuel efficient, and there is no political will to increase the gas tax. The ad valorem tax not only addresses none of these fundamental flaws, it may actually make them worse.

A percentage tax on gasoline leaves the HTF vulnerable to drops in oil prices in a way that a fixed per gallon tax does not. If oil prices drop or stay constant, revenues to the HTF will not increase. This means that these trends of diminished driving and greater fuel-efficiency will continue to reduce revenues under such a scenario. The ad valorem tax on gasoline effectively bets on the price of gasoline increasing in order to counteract our political challenges in raising the fuel tax. We need to consider whether this is a bet we want to take.

  • A wholesale ad valorem tax is less likely to be considered a user fee.

For many decades, transportation stakeholders have benefitted from the fact that the gas tax is considered a user fee. For one, this has insulated transportation investment from spending cuts (and, to a large degree, from government shut-downs). The HTF is, under law, permitted to exist only because the gas tax is considered a user fee. A trust fund shields transportation in many ways, and most areas of domestic spending would love to have a similar setup. Politically, the user fee is what makes it possible for authorizers – such as Barbara Boxer – to decide how to spend transportation money. Otherwise such decisions would likely be left to the appropriators, as it is for most domestic spending programs.

It is hard to argue that a wholesale tax is a user fee. As mentioned above, its opaque nature means that it is very unlikely to affect behavior. Also, as mentioned above, it may not be passed on to consumers at all. But even more problematic is that an ad valorem tax is linked to a global commodity price instead of consumption. This means that theoretically, prices could rise while demand is dropping, leading to an increase in revenues despite a decrease in consumption (or vice-versa). This is the opposite of a user fee, and has the potential to grossly mismatch revenues with need.


Overall, despite the potential drawbacks, the idea of a wholesale ad valorem tax on gasoline at the federal level deserves further exploration. Its potential to keep pace with inflation makes it very attractive, and perhaps some components could be added to such a tax that ensure protection for consumers from price spikes and protection for transportation builders from price declines. We could also add provisions to increase transparency and protect revenues from coming changes in VMT and fuel-efficiency.

Moreover, the shift away from a true user fee is not all bad either. This would simply continue our existing de facto policy in this area as in recent years more and more transportation revenues have been coming from general funds. This would bring us more in line with the rest of the world, and potentially allow better for funding decisions due to the freedom to operate outside the “donor-donee” issues and modal silos that have accompanied the HTF.

The bottom line is that the idea of a wholesale ad valorem tax on gasoline is one that should be carefully considered. While the transportation community might leap at this point towards any idea that has a chance of generating sufficient revenues, we must be careful to understand the consequences before taking the plunge.

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