Raise Taxes or Risk Disaster, What Is Best for the U.S.?

The United States is in a slow-motion train wreck that has nothing to do with the shutdown, Obamacare, or the pace of the economic recovery. In fact, if you own a new electric car from Tesla (TSLA -0.77%) or hitch a ride to work on a natural-gas-consuming city bus powered by Clean Energy Fuels (CLNE 0.44%) or Westport Innovations (WPRT 0.44%) you're contributing to the problem. The impending disaster actually stems from decreasing consumption of gasoline by the nation's automobile fleet and ends with collapsed bridges, compromised hazardous waste storage, a failing energy grid, and archaic wastewater treatment facilities.

What's the problem, you ask? The growing gap in required infrastructure costs and revenue generated from federal gasoline taxes. It's a simple relationship: As average fuel economy increases, gasoline consumption, and therefore tax revenue, decreases. Now of course, no one is suggesting that we stop using alternative fuels and improving efficiency, but there is an enormous problem on the horizon. Should we raise taxes, which two-thirds of Americans are against, or risk disaster with the nation's crumbling infrastructure?

The state of American infrastructure
D+. That was the grade assigned to the overall health of the nation's infrastructure by the American Society of Civil Engineers, or ASCE, in 2013. It shouldn't be too surprising considering a great majority of American tunnels, bridges, water pipes, and electrical grids were constructed over 50 years ago.

Image source: InfrastructureReportCard.org

Hey, at least we got a B- in language arts! 

ASCE estimates the country will need to invest $3.6 trillion to enter the 21st century. Let's put that in perspective. Based on 2012 figures from the World Bank, the sum of $3.6 trillion equates to:  

• 23% of American GDP
• 43% of China's GDP
• 106% of Germany's GDP
• 179% of Russia's GDP
• 100% of the GDP of the bottom 136 countries
• 5% of the entire world's GDP

If you think the grades or price tag required to bring our infrastructure into the 21st century are arbitrary, consider what's at risk. The Mississippi River Bridge in Minneapolis allowed 140,000 vehicles to cross America's longest river along I-35W daily. Although the bridge was rated as "structurally deficient" in 2005, the state didn't schedule for the bridge to be replaced until 2020, presumably when funding became available. That would prove too late. Minnesota's fifth busiest bridge collapsed on August 2, 2007, killing 13 people and injuring 145 others. Unfortunately, it wasn't the only bridge rated so poorly.

Image source: Wikimedia Commons / Kevin Rofidal

Is America risking further infrastructure disasters?

You can see exactly what contributed to the poor grades for each category by reading the full report card (link opens PDF). While understanding the problem in its entirety is important, the summary of the report doesn't require much persuasion: America's infrastructure desperately needs an overhaul. Can increasing federal gasoline taxes be a simple solution?

Polite countries sip their gasoline
The federal tax on gasoline is 18.4 cents per gallon, while the average state imposes a total additional 31.1 cents per gallon. While states steadily increase their taxes over time to increase revenue and improve their environmental footprint, the federal tax hasn't budged since October 1, 1993. That's a big problem. Remember that $3.6 trillion figure? Well, the federal gas tax generated just $24.6 billion in 2012. Depressing enough, but after accounting for inflation it's actually $4.5 billion less spending power than generated in 1993 -- despite a 17% increase in consumption!   

The problem is worse than just sitting on our hands for two decades. Even if we were to raise gasoline taxes on a per gallon basis, the amount of revenue generated each year would decrease with the current trend in consumption.

Source: Energy Information Administration

Increasing use of biofuels and alternative technologies and improving fuel efficiency are driving gasoline consumption downward. Throw in the new Corporate Average Fuel Economy, or CAFE, standards that will require automakers to roughly double the fuel economy of their fleets to 54.5 mpg by 2025 and it becomes clear that raising federal gasoline taxes may only be a small part of the solution.

To illustrate, consider the following annual revenue matrix of increasing taxes and fuel consumption scenarios.

Source: Author's calculations

Uncle Sam could have taxed gasoline to the tune of $1.00 per gallon in 2012 -- on top of state taxes -- and still would have only generated roughly $134 billion in revenue. At that pace it would take 27 years to invest fully in our current infrastructure needs. That doesn't mean federal gas tax increases should be off the table, but they surely won't bridge the gap on their own. Is there anything we can do to dig out of our funding hole?

Alternative solutions
As you can see, we're in a bit of a catch-22 as a nation. On one hand it's great to encourage the production of alternative fuels and electric and natural gas vehicles. Tesla believes it can deliver 21,000 vehicles in 2013 on the way to disrupting the makeup of the American auto industry. There's quite a long way to go, but who in their right mind would bet against Elon Musk over the long term? Meanwhile, Clean Energy Fuels and Westport Innovations are implementing the infrastructure and technology needed to convert the nation's commercial vehicle fleet to run on abundant natural gas. The former has already built a national network of refueling stations for truckers. Unfortunately, these innovations won't help generate revenue for public works projects because they reside outside of the current consumption tax model.

On the other hand it is a bit misguided to only tax gasoline consumption in the nation's transportation system if the goal is to fund infrastructure, not penalize gasoline use. What can be done? While taxes are an obviously unpopular choice no matter how they're construed, they're probably the "simplest" way to start hacking at the $3.6 trillion elephant in the room. They can also be implemented in a number of ways. Gasoline taxes could simply be indexed to 1993 consumption such that they always generate $30 billion (or some other figure) in annual revenue. That would gradually penalize gasoline automobiles, although it would create an incentive to invest in alternative engines -- spurring Tesla, Clean Energy Fuels, and Westport Innovations.

Or perhaps the government needs to look outside of transportation taxes for funding infrastructure, since not all the infrastructure in need of repair is related to travel. For instance, a small tax on our newfound energy reserves could go a long way. Better yet, it would generate a revenue stream that would grow with production and consumption. The only problem with taxing energy is that it, too, would eventually trickle up to all Americans.

Foolish bottom line
Regardless of what solutions we come up with to tackle our dismal state of infrastructure one thing is critically clear: America needs to begin investing in its future today. Each year we wait to even have a discussion on the topic is another year we risk more disasters like the Mississippi River Bridge collapse. As a citizen of America's "City of Bridges" -- with a world-record 446 bridges -- I don't want to risk the inevitable. Do you have an idea that could help fund our infrastructure deficit? Tell me in the comments section below.