Remember that time when the Organization of the Petroleum Exporting Countries tried to wrestle market share away from American shale oil producers? Well, it hasn't been so fun for oil stocks, but there are several benefits to be had. You'll probably spend less on gasoline in 2015 than in any year since 2004. Many companies will benefit from lower fuel and input costs this year, which could boost margins for small businesses and several industries including airlines (good news for investors). And, if Congress and the House of Representatives can build upon recently formed common ground, then it could be the year the United States finally raises the federal taxes on gasoline and diesel fuels!
Wait, you're not excited? OK, OK. I know most of us are programmed to despise taxes and spending any more money than we have to, but taking advantage of dramatically lower gasoline and diesel prices nationwide to raise federal taxes actually makes a lot of sense right now. Allow me to explain.
America's $16 billion-per-year problem
Last year the federal government spent $50 billion on maintaining, repairing, and replacing transportation infrastructure. Receipts from the federal gas tax are used to foot the bill, but there's one big problem: Total revenue from federal taxes on gasoline and diesel fuel amounted to just $39.3 billion in 2014. The funding gap was wider than that, however, as total tax receipts are broken into (1) an account for the Highway Trust Fund, (2) an account for the Mass Transit Fund, and (3) an account for underground storage tank leaks.
After funneling the funds to the proper uses, the federal government had just $33.5 billion to use toward its $50 billion in transportation expenses, resulting in a deficit of roughly $16.5 billion.
Unfortunately, 2014 wasn't the only year funding fell short. Receipts from federal fuel taxes have failed to cover Uncle Sam's transportation expenses for several years. Why don't fuel purchases generate enough tax revenue to fund expenditures? The reasons are obvious, the solutions numerous, and the sense of urgency virtually nonexistent. But there is a small window opening now, with gasoline prices at multi-year lows.
There are a few factors contributing to the funding gap. Federal gasoline taxes haven't been increased since 1993. Uncle Sam entered 1990 earning 9 cents per gallon and increased it to 14.1 cents by the end of the year, and once more in 1993 to 18.4 cents. That's where it sits today, along with a federal tax on diesel fuel of 24.4 cents per gallon.
To put that into perspective, consider that the federal gasoline tax increased 104% in the 48 months from 1990 to 1993 but hasn't budged in the 253 months since. The stagnation has occurred at the same time states have taken every opportunity to increase their gas taxes. Today's federal gasoline and diesel taxes are lower than the average of all state taxes of 24.17 cents per gallon and 24.70 cents per gallon, respectively. The former is lower than the taxes charged by 44 states.
Stagnant taxes alone aren't necessarily a bad thing, but they are when gasoline and diesel fuel consumption -- the very behavior driving revenue generation -- begin declining. That's exactly what began happening after both gasoline and diesel fuel consumption peaked in 2007. A combination of rising fuel economy across the nation's truck and automobile fleet and an increased use of renewable and alternative fuels has exacerbated the consumption "problem" (admittedly a good thing outside of this discussion).
The shape in the consumption chart above is identical to that of the chart below displaying federal gas tax receipts over the same period.
The good news is that politicians from both major parties have shown openness to increasing the federal fuel taxes in the midst of depressed gasoline prices in recent weeks. How painful would a potential increase be on your wallet -- and do any alternatives exist?
Three steps to raise federal fuel taxes
Solutions are relatively simple. First, Uncle Sam would need to increase federal gasoline and diesel fuel taxes. It sounds painful, but closing the nearly $16.5 billion annual funding gap could be as painless as adding 10 cents per gallon of gasoline and 5 cents per gallon of diesel (using 2014 fuel consumption data). Most consumers would hardly notice that -- national gasoline and diesel prices have dropped 8.5 cents and 7.6 cents on a per-gallon basis, respectively, in the past week alone. We could be bold and increase the tax even more to expedite infrastructure project financing, if only temporarily, but breaking even is the first priority.
It's important to note that increasing the federal gasoline and diesel taxes would result in the same increases being applied to alternative fuels, which are taxed at the same rate of the fuel they replace. For instance, liquefied natural gas from Clean Energy Fuels is taxed at 24.4 cents per gallon, the same as diesel fuel. After all, owners of vehicles powered by alternative sources use the same roads as their gasoline-powered peers.
Second, raising taxes once isn't enough. The federal government must adjust fuel taxes each year to a benchmark -- whether a certain year, consumption total, or the like -- to assure funding gaps don't crop up down the road as fuel economy continues to rise.
Third, the government should consider using some of its annual tax receipts to fund new technologies that reduce road construction and maintenance costs through automation, monitoring, or novel materials. Such technologies would help lower transportation infrastructure costs over the long term, thus saving taxpayers money.
Several potential technologies already exist. For instance, Kraton Performance Polymers (NYSE:KRA) has developed Highly Modified Asphalt, or HiMA, technology. The engineered polymer is blended into asphalt formulations to improve functionality. HiMA can reduce road thickness by up to 40% compared with conventional asphalt applications, while simultaneously reducing wear 67%. The result: savings in upfront material costs and reduced maintenance costs over the life of a road.
Kraton Performance Polymers has steadily grown HiMA sales in recent years and has deployed the technology in New Zealand, Australia, Brazil, Russia, and closer to home in Alabama. My question is: If the technology exists and can be deployed economically, then why aren't we using it more widely?
What does it mean for you?
It wasn't OPEC's intention, but lower gasoline and diesel fuel prices could lower the long-term cost of transportation infrastructure maintenance for American taxpayers. The good news is that now is the perfect time to institute federal fuel tax increases, which have been long overdue, as most consumers would probably never notice. That also presents the opportunity to over-fund transportation budgets to spur new technology development, such as Kraton Performance Polymers' HiMA.
Whether you support or oppose tax increases, the gap between federal transportation expenses and fuel tax revenue has forced the government to pull funds from other programs when crafting annual budgets. Therefore, we're all still paying to make up the difference in one form or another. But it may be quite simple. If you're willing to give up the gasoline and diesel price declines of the past 10 days, then you may be willing to stomach a tax increase.