The Effect of the New Federal 2012-2016 Fuel Efficiency Standards on State Gas Tax Revenues

President Obama announced new emissions regulations yesterday that impose tougher standards for fuel efficiency and tailpipe emissions. The regulations that owe much to California’s current regulations kick in between 2012 and 2016. By 2016, the average fuel efficiency of passenger cars will be 39 mpg, and 30 mpg for light trucks. The mandated increase in average vehicle efficiency on current levels is around 10 mpg.

These changes are undoubtedly welcome, both from an environmental and national security perspective. But the announcement is also a clear sign that the discussion around how surface transportation is funded needs to pick up speed. The future of the gas tax looked hazy when the first hybrid car hit the road. It is looking very fuzzy now.

So what will these changes cost North Carolina in gas tax revenues between 2012 and 2016? This is not an easy question and precise answers are not possible. What is possible is to arrive at some estimates of the range of revenue loss caused by the new standards.

I have done some rough and ready back-of-the-envelope calculations. Here are my assumptions:

1. The savings in oil between 2012 and 2016 equals 1.8 billion barrels nation-wide (White House figure);
2. Thanks to innovations in oil refining, one barrel of oil yields 42 gallons of gasoline;
3. North Carolina’s share of national gas consumption will continue to be around 4%.

Based on these assumptions, 72 million barrels or 3.024 billion gallons of gas will be saved between 2012 and 2016 in North Carolina due to the new standards.

Since our gas tax is based on the wholesale price of gasoline, but I am working through retail prices predictions for the purpose of this quick estimate, I assume that the ratio of wholesale to retail prices remains similar to last summer (although wholesale and retail price ratios vary for economic reasons too arcane to reflect on here). This is a big assumption. A careful recent academic study of retail gasoline pricing indicate that average retail margins shifts some over time.

Predicting the actual average retail price of gas years ahead is notoriously difficult. Experts were predicting it would hit $7 per gallon by 2012 in April 2008. That looks less likely now. The White House using Energy Information Administration predictions expects gas prices to average around $3.20 in 2012 rising to $3.50 per gallon in 2016. Those figures feel low to me, but it should be noted that last summers price increases were unprecedented.

In the end, most analysts make big assumptions over supply and futures markets when making predictions many years ahead, so here is mine: I’m going to make the heroic assumption that gas will average between $3.50 and $4 or so per gallon in the 2012 – 2016 period.

Therefore based on North Carolina’s gas tax formula (fixed rate of 17.5 cents per gallon plus 7% of wholesale price per gallon) and assuming the current NC Senate bill creating a gas tax floor (as opposed to today’s cap) of 29.9 cents per gallon becomes law, a reasonable estimate is that the gas tax will average 40 cents per gallon between 2012 and 2016. It is a rough but defensible estimate. As a low estimate, let’s assume that the 29.9 cents per gallon cap remains – the current bill fails – and that the gas tax is at the cap between 2012 and 2016. Its also a useful marker if gas prices remain low and the bill establishing the 29.9 cent floor succeeds.

The estimate: the gas tax revenue loss in North Carolina between 2012 and 2016 caused by the new federal standards could well be between $900 million and $1.2 billion. Putting that into context, based on current collections, estimates of this magnitude represent an annual drop in gas tax revenues of the order of 15 to 20 percent.

Given that three-quarters of our gas tax revenues fund road maintenance, public transportation, ports and rail and the rest supplements vehicle sales tax revenue in the Highway Trust Fund to build new roads, the need to move to a new revenue base in this state and this country got a little more pressing.

The less attractive alternative is to change the state gas tax formula to produce higher rates in order to offset the decline in revenue per vehicle mile travelled due to the growing fuel efficiency of vehicles. The problem with that approach is that raising rates becomes increasingly inequitable: drivers of internal combustion engine vehicles subsidize hybrid and electric vehicle owners. It is also hard to see low income people in hybrids and electric vehicles, so there will be an additional regressive impact.

Anyway you look at it, the clock is now ticking a little faster on the gas tax.

2 Comments

  1. IBXer

    May 21, 2009 at 10:24 am

    Obama is selling this fiasco as a savings to the US consumer because it will reduce the cost of fuel and here you are arguing we need to increase taxes on gasoline to offset those savings.

    Just one more example of the left lying to the American people to force their agenda down our throats.

  2. Steve Jackson

    May 21, 2009 at 11:17 am

    IBXer,

    I actually say that increasing the gas tax is a less attractive alternative for equity reasons if you read carefully.

    Notwithstanding that, a multitude of studies on gas taxes conclude that the effect of the gas tax on retail price is negligible. It certainly has no affect on price growth. Of far greater importance on both the price level and growth (and in no particular order): retail margins vary a great deal, sometimes within the same outlet over a period of weeks, futures markets change, sometimes in response to anticipated demand, sometimes in response to security issues, and oil supply fluctuates, mostly as a way of maximizing profits among cartel members.

    Controlling our thirst for gasoline has large positive national security implications, don’t you think?

    I’d say Obama won the election by quite a margin. Hardly ‘forcing’.