Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

What Would the Proposed New Gas Tax Mean for You?

By Jamal Carnette, CFA - Jun 28, 2014 at 11:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Washington is proposing a new gas tax, who are the winners and losers?

"Don't tax you, don't tax me, tax the man behind the tree." – Russell B. Long

Last week, Senators Chris Murphy (D-Conn.) and Bob Corker (R-Tenn.) proposed a increase of the gas tax by 12 cents over the next two years then indexing it to inflation. And while taxes are unpopular, especially gas taxes, this may be a necessary move. This increase will raise a reported $164 billion to replenish the National Highway Trust fund, which is anticipated to run out soon.

It is important to note that this is merely a proposal, but with any government action there are winners and losers. And with something as big as the National Highway Trust fund, there are some clear winners, clear losers, and a little ambiguity from this proposal.

Highways seem important, right?
The U.S. highway system is an important part of trade and the overall economy. Signed into law by President Eisenhower as the Federal-Aid Highway Act of 1956, the end result was 46,876 miles of highways and a huge increase in commerce. Matter of fact, much of the economic growth of the 1950s and 1960s is attributed to the interstate system – both from increased trade and the economic impact of the project itself.

But it was expensive; the ending tab was nearly $120 billion, nearly five times more than what was expected -- $27 billion. One way to pay for this, and annual maintenance, was to charge a tax on gas sales -- at the federal level that amounts to 18.4 cents per gallon. A combination of increased CAFE standards and fewer driven miles has really hurt this tax collection strategy – it is estimated the National Highway Trust will run out of gas (pun shamelessly intended) in September.

Winners of the increase
Increasing the gas tax will keep the program solvent, and has the potential for the U.S. to work on our crumbling highway system. A recent report shows how stark this is: The American Society of Civil Engineers grades America's infrastructure a D+ and estimates we will need $3.6 trillion by 2020 to improve our roads.

That's great news for construction-dependent firms like Caterpillar, Joy Global, and US Steel ( X 0.35% ). Other categories will be construction workers that are still rebounding from the toll the Great Recession took on construction – namely home construction.

US Steel could use the help -- after hitting nearly $24 billion in revenue and $18.04 per share in EPS in 2008, the company hasn't registered $20 billion in revenue since and has reported a loss every year. That all culminated in an impairment of goodwill due to its Flat-rolled and Texas Operations reporting units.

Another possible big winner is electric and/or hybrid car manufacturers. Tesla recently shocked the investing community by releasing its patents -- an increase in gas prices could push car shoppers to try this new technology.

Losers of the increase
The losers of the increase are the gas companies themselves. Although gas is considered a rather inelastic good, one that price doesn't ultimately determine quantity demanded, dealing with a near doubling of the gas tax has the ability to change driving habits in the short run. In the long run, people can make necessary changes to limit their gas intake and governments will be pressured to provide better public transportation solutions.

But that's not the only losers. Any business model that's based upon servicing drivers could be affected. Wal-Mart ( WMT 1.08% ) exploited the highway system and used it for a competitive advantage. Through its excellent logistic policy, it eventually drove mom-and-pop retailers out of business to become the largest retailer in the U.S. Now faced with competition from the Internet, namely Amazon, it will be tough to handle a less-mobile shopper.

Ok, now what about me?
Unfortunately, that's harder to quantify. If this idea passes, you will have to pay more at the pump, that's for sure. However, it would be myopic to say this is a bad thing. The issue hinges on the differences between explicit and hidden costs. Many don't think about the huge toll poor roads place on their cars now. Estimates vary, but a shocking estimate in New York pegged the cost of poor roads to be upwards of $1,300 a year in lost time, tire repairs, alignment issues, and a host of issues that arise from poor roads. Other studies peg the cost at a more conservative $324 per motorist annually.

Obviously these are estimates, but for the average motorist -- using the conservative estimate and the full two-year increase in taxes -- the breakeven would be 2,700 gallons ($324/.12 per gallon). Considering the average 2014 fuel economy is nearly 24 miles per gallon that would be equivalent to nearly 65,000 miles per year. And while these are all-or-nothing circumstances and estimates that can't be fully replicated in real life, it does show the toll poor roads take on your car.

Final Foolish thoughts
This tax is merely a proposal, but whenever Washington has a proposal it is good to look at the idea rationally rather than issuing a knee-jerk reaction. And while we all hate taxes, as Russell Long so eloquently pointed out, Foolish readers should peel back the layers to determine whether Washington's decisions are beneficial or not.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$139.00 (1.08%) $1.49
United States Steel Corporation Stock Quote
United States Steel Corporation
$22.65 (0.35%) $0.08
Tesla, Inc. Stock Quote
Tesla, Inc.
$1,009.01 (-0.59%) $-5.96, Inc. Stock Quote, Inc.
$3,427.37 (1.11%) $37.58
Caterpillar Inc. Stock Quote
Caterpillar Inc.
$201.28 (1.76%) $3.48
Joy Global Inc. Stock Quote
Joy Global Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.