Our Fuel Tax: Schizophrenia in Motion

By Tom Yamachika, President, Hawaii Tax Foundation

December 31, 2015 not only marked the end of the top Hawaii individual income tax rates, but also of some fuel tax provisions. For example, the state portion of the gasoline tax dropped from 17¢ to 16¢. Because the fuel tax goes into the highway fund and the Department of Transportation spends it, that department felt compelled to go back to the legislature to get that 17¢ tax restored. And as long as they’re there, the Department figured they would ask for a tax hike as well. 

In HB 2409 and SB 2938, the Department asked for the state portion of the gasoline tax to be raised from 16¢ to 19¢; an increase in the vehicle weight tax of about 50% for passenger cars (there are various rates depending on weight); and for a hike in the vehicle registration fee from $45 to $60. They asked for hikes in all three of the above in the name of fairness. The gasoline tax is imposed on liquid fuel, and effectively taxes most auto usage, but of course it does not fall as heavily on electric vehicles, alternative fuel vehicles, and hybrids. The vehicle weight tax is designed to get contributions in proportion to road usage, on the theory that heavier vehicles cause more wear and tear on the roads, and also focuses on the electric vehicles that tend to be heavier. Finally, the vehicle registration fee is imposed on each vehicle so each vehicle will pay something toward road upkeep. 

The House bill died a while ago and the Senate bill was recently killed by the House Transportation Committee, so the issue of how to fund our highway and bridge maintenance still needs to be dealt with.

Of the three taxes that were in play here, we focus on the fuel tax because there are other fuel tax bills alive, and they might be amended to accomplish the fuel tax hikes. It’s not over until the legislature adjourns.

We need to realize that there are two starkly different rationales that apply to fuel taxes.

The first rationale likens the fuel tax to a user fee. We have roads and highways and bridges that need to be repaired. The fuel tax makes those who use the roads pay for them. This is how we justify exemptions for off-highway use of fuel, such as for farm tractors.

The second rationale is that our fuel tax is a "sin tax" on fossil fuel. We tax tobacco and alcohol in an attempt to curb usage of these items (although we don't ban them outright), and our fuel tax can be thought of as a similar disincentive to using fossil fuel. Indeed, last year one part of the fuel tax, called the “barrel tax,” was amended to apply to non-petroleum fossil fuels, such as coal and liquefied natural gas (LNG). It’s now clear that this tax applies not only to fuel used in cars and trucks, but also to fuel consumed in electric power generation. The sin tax rationale justifies at least that part of the fuel tax.

In weighing these two diverse policy goals, we also need to be thinking about the regressivity of the fuel tax. Similar to the General Excise Tax, the fuel tax does not distinguish between the wealthy and the destitute. Everyone in our community bears the burden of the fuel tax if we drive cars or use power. Those of us who live in suburban and rural areas may need to drive more than others, on average. If we jack up this tax by 15% as requested, who in our community is going to suffer the most?

We need to recognize the schizophrenic nature of the policy rationale behind our fuel tax and figure out how it might be applied more fairly in light of its diverse aims.

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