Fuel Taxes Taking a New Route?

As a CPA, I’ve been dealing with taxes for my entire career. To be honest, it’s a part of my job that I really don’t enjoy. There are so many different tax rates and so many inconsistencies when comparing different states, or even counties within the same state. Plus, taxes are always changing! For me, it’s a never-ending battle to stay on top of taxes, especially fuel taxes which are an important component of fleet fuel management.

As most of you have probably heard or read, there is another fuel tax battle brewing as new approaches are being considered to raise the tax revenue needed to fix our decaying transportation infrastructure. An easy option is to just raise the tax per gallon and that will almost certainly be part of any legislation. We can debate the reasonableness of the increase or whether the additional revenue will be spent on the most worthy projects, but, it seems to me a more important debate is whether taxing by the gallon still makes sense.

The primary approach of a flat tax per gallon has been around for many years. It’s a relatively simple model; you buy fuel, you pay tax. It’s simple, but flawed. First, it’s clear what happens when a flat tax per gallon is not set-up to automatically keep up with inflation. Federal fuel taxes haven’t been raised since 1993, yet the cumulative inflation rate has been over 60% since then. To keep pace, the Federal diesel fuel tax rate of 24.4 cents would really need to be about 38 cents today, an increase of 14 cents over 20 years. You don’t have to be an accountant to see why we’re running out of money to pay for roads and bridges.

Rep. Earl Blumenauer (D-OR) recently announced a proposal called The UPDATE Act which would increase fuel taxes by 15 cents/gallon tax over the next three years and then tie it to the inflation rate. 15 cents seems reasonable based on inflation, but it sure hurts when it hits you over three years instead of over 20. If this was addressed sooner, very small increases each year would have been much easier to absorb.

Paying fuel tax by the gallon has another flaw because it is losing relevance to what actually drives the need to spend money maintaining and improving our transportation network. Vehicles driving on the road cause this. Federal lawmakers recognized this simple fact when they said you don’t have to pay tax when fuel is used off-road. But what if more people are driving vehicles that use less fuel, or even no fuel, and they travel those same miles? They get a free ride (pun intended).

Allow me to digress for a moment… Imagine if fuel tax wasn’t based on gallons purchased. Imagine no longer needing dyed off-road fuel. No longer needing to separately store and distribute the same product just because of some dye in it. No more costly dyed fuel contamination headaches…

Of course there would be new headaches. If we don’t pay fuel tax by the gallon, the proposed alternative would be based on the amount of miles driven. The vehicle weight class may also be factored into the tax equation. That part should be relatively straightforward since it is already addressed in the vehicle registration process and typically doesn’t change for the life of the vehicle.

There’s more logic with this approach since it is based on wear-and-tear, but the ability to implement and administer this will be a major undertaking. Many questions need to be addressed regarding how the vehicle mileage data will be captured? Will it rely on periodic odometer readings or real-time GPS tracking? Will that be considered invasive? How will fraud be prevented? How frequently will tax payments will be required? What about toll roads? I could go on and on…

Even though it may be very hard to change how fuel taxes are levied, I think it’s important to view the current per gallon approach as a no-win situation. Increasing numbers of fuel efficient vehicles will force fuel taxes to be raised beyond the rate of inflation simply because the tax base is declining steadily. The end result will be a disproportionate share of very high taxes being paid by companies with fleet fueling needs that consume significant amounts of fuel.

It will be very interesting to see how the fuel tax battle plays out during the course of 2014. No matter what happens, there will be far reaching repercussions. And, of course, you will pay more one way or the other.

Howard Abrams