On Monday, I discussed why Tesla’s latest announcement was big. The electric carmaker said it planned a modification that would give its autos the ability to accelerate faster than cars that cost two to three times more and keep up with those that cost 10 to 20 times more. That’s an astonishing accomplishment. I made the supposition that if you squint, you can see the beginning of the end for gasoline-powered internal combustion engines. They won’t go away for a while, but they have a credible challenger in electric battery-powered vehicles.
Let’s assume for the moment that my wild-eyed speculation is correct. Play this out and it means that at some point in the future, sales of gasoline-powered automobiles will peak and begin to fall. This has enormous ramifications for the U.S. transportation grid, and the health of the American economy — and for anyone investing in energy or transportation and all the related industries.
We now pay for the maintenance and construction of our interstate highway system, bridges and tunnels — plus many state and local roads — through the Highway Trust fund. (We have discussed this before here, here, here and here). The Fund is financed by a gasoline tax that has been stuck in a time warp. The last time the tax was increased to keep up with the cost of construction and maintenance was in 1993, to 18.4 cents a gallon. But now the Trust fund is being starved of funding because the tax wasn’t indexed to inflation. Adding to the strains is weather that has gotten worse for roads because of hotter summers and colder snowier winters.
A never-ending series of emergency measures and short-term fixes have kept the Fund afloat, but now it’s just about out of money.
Even the Senate’s proposed three-year agreement (which is still too little) will be a challenge to get through the House, which only is looking to extend federal highway spending to December.
Which brings us back to the rise of electric-battery vehicles. If my modest projections are right — half of all cars sold in the U.S. and Europe by 2035 will be either plug-ins or hybrid-electric — then the demand for gasoline is going to start falling. We don’t know when peak gasoline will occur, but even the most skeptical observer of the auto industry knows that gasoline sales are not likely to continue rising during the next century.
How about 50 years — can anyone legitimately make the case that gasoline sales are not going to peak at some point within the next five decades? It isn’t even a huge stretch to imagine a plateau beginning as soon as 2025.
Which brings us back to the issue of road maintenance: If my speculation is even remotely correct, the era when we finance highway construction and maintenance with a consumption tax is coming to an end. At some point in the not-too-distant future, gasoline sales won’t even have the potential (which they have today) to fund road maintenance. The aversion to tax increases now makes even the most rudimentary repairs difficult or impossible; in the future, the U.S. may not even have the option of turning to a gas tax increase because the sales base won’t be there.
The window is beginning to close on refinancing America’s debt at historically low interest rates. Make me your all-powerful benevolent king and I will float a $5 trillion, 50-year bond offering to rebuild the entire transportation infrastructure, from bridges to tunnels to highways, including technologically advanced, cleaner, smart roads. But short of that, doubling the gas tax to 37 cents and indexing it to inflation will keep the roads functional, allowing for the efficient transportation of goods around the nation.
Of all the taxes we love to hate, the gasoline tax is the most innocuous. It isn’t even a true tax, but a usage fee: The more you drive, the more goods you consume, the more you pay for the cost of the roads that make the modern U.S. economy possible.
The U.S. highway system, once the envy of the world, has become anational embarrassment. It’s long past time to change that.
Originally published as: Raise the Gas Tax Before It’s Too Late