We as a nation received some pretty harsh financial news in a statement from a secretary of Bush's cabinet to the media released over the weekend (when bad economic news is always released) that will drastically affect our already-slumping economy. I'm not talking about the government's takeover of Fannie Mae and Freddie Mac. I speak of course about the highway trust fund. Transportation secretary Mary Peters announced on Friday that the government will run out of money this month to pay for highway projects all around the nation, and states like Oklahoma are scrambling to defer payments for projects already bid, postponing upcoming bids, and basically grinding existing construction to a halt. So a disaster, right?
Well, from my own selfish perspective, absolutely! One of my company's projects was scheduled to bid this month, and now it won't. But the reason for the shortage in federal monies is because revenue from the federal gas tax has decreased, but the need for road projects has not. In other words, people are driving more miles while buying less gas. This is an effect of good fuel efficiency! We've been wanting it for years, and we're finally seeing what the effects are on our economy.
So, should anything be done? Of course! The federal gas tax, unlike a sales tax, stays at a constant rate of 18.4 cents per gallon no matter how much that gallon of fuel costs. When gas was at about $1.30 per gallon, it resulted in a 14% de-facto sales tax. Now that gas costs somewhere around $3.40 per gallon, the de-facto sales tax has decreased to around 5%. Having a gas tax that stays at a constant rate makes sense in a very narrow and theoretical way: the physical damage to highways comes from the number of user-miles driven on them, and not by the price of the gas burned to drive on them. But with improving fuel economy, more user-miles can be driven on highways for the same cost. Plus the cost of materials for construction has risen dramatically, partially because the cost of fuel has gone up so much. It would make much more sense for the road-building business if the revenue from the gas tax could be tied to the cost of the fuel since the cost of new construction of roads is going to rise right along with the cost of fuel anyways. The way things work right now is that the government runs out of money, large numbers of private contractors run out of work, people lose construction jobs, and drivers are stuck in more traffic.
Now, the trouble is getting a politician to agree to an increase in the gas tax. It will never happen. But like so many things, what's best for our economy is also just about the least popular idea ever. As it happens, most economists see the gas tax as way too low and think the gas tax should raise dramatically (at least a dollar per gallon). But politicians want to suspend the gas tax because lowering taxes is always a popular idea. Unfortunately, popular ideas always trump smart ideas.
P.S. Expect to see more earmarks because of this too.