How Fuel Economy Standards Hurt Government Revenue

Fuel economy standards should be set in response to consumer needs, not an arbitrary rate set by the government.

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MILL VALLEY, CA - MAY 12: A customer pumps gas into her car at an Arco gas station May 12, 2010 in Mill Valley, California. The price of gas is falling as the price of oil decreases and gasoline supplies are good. The average price of a gallon of regular unleaded is currently about $2.90 nationwide and experts predict it will fall to an average of $2.70 by the summer.

Gregg Laskoski is a senior petroleum analyst for GasBuddy.com.

When Congress passed the $105 billion Surface Transportation Extension Act in June, its first major transportation bill since 2005, it secured funding for the Highway Trust Fund, the critical key funding source that reimburses states for spending on roads, bridges, mass transit, and other transportation projects. That measure was essential to pay for hundreds if not thousands of badly needed infrastructure improvements.

But, the bill ensures that highway and transportation funding remains at its current level only through the end of fiscal year 2014. Was it worth the effort? Many news organizations logically suggested that Congress needs to pass long-term legislation that does one of the following: A) raises the federal gasoline tax (18.4 cents per gallon) that hasn't been increased since 1993; B) transfers money from the government's general fund into the Highway Trust Fund; or C) finds a new revenue source that lets transportation projects materialize in a timely manner.    

With the current U.S. budget deficit at $1.2 trillion, it's unlikely that the "general fund" will be able to make up for the Highway Trust Fund's perennial shortfalls as the Congressional Budget Office, known as CBO, says it expects a $10 billion deficit this year. The Highway Trust Fund probably isn't something we should place much trust in, come to think of it. Business Week's Carol Wolf reports that it's approached insolvency three times since 2008 and since 2001 it has spent more money than it has taken in every single year except for 2006. Regular folks can't do that, but if they did, trust would be hard to find. 

[See a collection of political cartoons on gas prices.]

The trust fund's big problem is that U.S. fuel consumption is declining and that decline is accelerating due to more fuel efficient vehicles. Part of the blame rests with the way the federal gas tax that feeds it is collected. It's a fixed amount, not a percentage that rises and falls with the price of gasoline. And if new federal mandates for Corporate Average Fuel Economy regulations remain in place, the Highway Trust Fund's revenue level stands to lose another $57 billion by 2022, according to the CBO.

The proposed Corporate Average Fuel Economy standards are popular with environmentalists and loathsome to many who believe the free-market system should determine what kind of cars and trucks auto manufacturers produce and what kind of food and drink restaurants serve, not government. Ironically, it's the government's own bean counters, specifically, the CBO, that says the proposed Corporate Average Fuel Economy standards will cause gasoline tax revenue to fall by $57 billion between 2012 through 2022. It recommends a federal gas tax increase of 5 cents per gallon to offset the $57 billion loss.  

Corporate Average Fuel Economy standards might work best for everyone if they're imposed voluntarily by manufacturers responding to consumer needs. When mandated by government they're simply another form of taxation and we know who ultimately bears the brunt of it. Something's got to give.

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