HB64: Can You Afford Inflation Indexed Fuel Tax?

The legislature keeps moving forward with tax hikes. The bill to index-link the gasoline tax, HB64, has been received for introduction in the House. Watch it carefully - you won't feel the pain from this one right away, but as time goes by and 2-3 percent inflation keeps eating away at your paycheck, this bill will raise the gas price at the pump even if the gas price itself stays unchanged. The tax, namely, will increase with consumer price index, not the gas price. 

It is not entirely clear exactly how the inflation rate will increase the tax, but here is a suggestion for how it could work. If the tax is 24 cents per gallon today, and inflation over the past year has been three percent, then the 24-cent tax will be increased by 0.7 percent. Next year, the process is repeated (or, technically, every two years according to the bill). This seems like the reasonable application of inflation indexing; the alternative, to mark up 24 cents by three cents - one for each percent inflation - would be disastrous. It would shoot the tax rate into the skies over a short period of time.

That being said, a mark-up over time is still going to be costly. For example, if the index-link had been introduced

  • in 2002, by 2007 a 24-cent tax would have increased to 28.2 cents per gallon;
  • in 1992, by 1997 a 24-cent tax would have increased to 28.3 cents per gallon;
  • in 1982, by 1987 a 24-cent tax would have increased to 30 cents per gallon;
  • in 1972, by 1977 a 24-cent tax would have increased to 35.9 cents per gallon.

These periods were all ones of a strong-performing national economy. They all demonstrate how this inflation indexing of the fuel tax, under relatively normal economic conditions, quickly raises the cost of gasoline to regular Wyoming families. 

At a constant gallon price of $2.75, over a five-year period these tax increases would have raised the cost of an 18-gallon fill-up by anywhere from 76 cents to $2.14. That does not sound like much, but consider this experiment. Suppose you drive 18,000 miles per year and you get 24 miles per gallon on average. By the end of each five-year period above, your annual cost for gasoline will have increased by

  • $567 with inflation as it was in 2002-2007,
  • $580 with inflation as it was in 1992-1997,
  • $810 with inflation as it was in 1982-1987, and
  • $1,606 with inflation as it was in 1972-1977.

In other words, if the gasoline price itself remains unchanged and inflation from today to 2024 is similar to what it was in 1992-1997, by 2024 you will be paying $580 more per year just for gasoline. 

Most people don't drive 18,000 miles per year with one car, and most people get more than 24 miles per gallon with their cars. However, many households combine a small car with a truck or an SUV, which means that the above numbers can be thought of as an average total miles-and-mileage experiment for a two-vehicle family. 

In fact, just to show how dynamic the impact of this bill can be, if you drive a total of 24,000 miles per year with those two vehicles, in five years your fuel cost will rise from $756 - under the lowest-inflation scenario above. With a little bit of bad luck and inflation tracking where it was in the 1980s, in five years you will be paying over $1,000 more per year for gasoline. 

Please also keep in mind that these cost increases do not take into account any changes in the gasoline price itself. For example, in the 1980s the price of a gallon of unleaded regular hovered around $1 per gallon; the above experiment assumes that the price stays at $2.75. That is a reasonable assumption given today's gasoline market, but it was not too long ago we paid more than $3 per gallon. I still remember having to pony up $4+. 

If the price itself goes up, it does not affect the indexation of the fuel tax, but it obviously adds to the cost at the pump. Then, of course, there is also the impact of inflation on the rest of your expenses.

To make matters even worse, HB64 does not allow for much of a decline in the tax if there is deflation. It will never fall below 23 cents per gallon. In a sense, HB64 is there to always guarantee revenue for government but never give taxpayers a real break. 

It remains to be seen what the House does with this bill. If it does, hopefully there will be a vigorous debate over it in the Senate. 

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