INTRODUCTION. 1 of 15 11/9/10 12:48 PM

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1 INTRODUCTION Perspective on The Gas Tax and Car Registration Fees By Mary E. Forsberg March 2002 Table Of Contents Introduction Gas Tax Theory Gas Taxes and Motor Vehicle Fees - A Short History The New Jersey Story Comparison To Other States The Gas Tax Is Regressive - Or Is It? Conclusion Appendix A: Motor Fuel and Motor Vehicle Collections by State Appendix B: Factors Used to Determine Registration Fees Appendix C: Motor Vehicle Registration Fees in 2001 in New Jersey Appendix D: New Jersey Motor Vehicle Registration Fees Over Time End Notes Anyone who has ever been stuck in a New Jersey traffic jam might think it odd to declare that motor vehicles are under-utilized in this state. But in a very important sense they are underutilized - not as vehicles for transportation, but for contributing revenue that helps make up for the costs that cars and trucks incur and for transportation needs in general. The Federal Highway Administration estimates that nearly 6.4 million motor vehicles were registered in New Jersey in October 2001, tenth highest in the nation. And the owners or drivers of these vehicles pay the state of New Jersey a tax every time they put gas in the tank and a fee every year when they comply with the law requiring the vehicles to be registered. Approximating the costs of providing services and matching them to the level of benefits each taxpayer receives is imprecise. Different people have different ideas about what should be considered a cost. Should gas taxes be used only to build and maintain roads or should they help support mass transit to reduce road traffic? Should they be diverted to preserve open space as was unsuccessfully attempted by former Governor Whitman? Who benefits from transportation spending and by how much? Should bigger, heavier cars and trucks pay more because they cause more damage to roads? These are all questions worthy of public debate. But what is clear from the very start is that, when compared to other states and to its own needs, New Jersey is undercharging motorists. Maintaining such a policy has serious financial and quality-of-life implications for all New Jerseyans. 1 of 15 11/9/10 12:48 PM

2 The inflation-adjusted price of gasoline is lower today than it has been for much of the post World War Two era. The National Research Council in 1997 found that declining real gasoline prices and rising incomes have led to a 30 percent increase in motor vehicle travel in the United States in the previous 10-year period. Federal Highway Administration research shows that from 1998 to 1999 alone, US gasoline consumption rose by 2.5 percent and vehicle miles traveled increased by 1.4 percent. None of this would surprise harried New Jersey motorists. But what they might not realize is that, at 10.5 cents per gallon for gasoline and 13.5 cents per gallon for diesel fuel, the state collects far less in motor fuels taxes than it could - or should. Data from the American Petroleum Institute show that New Jersey has the third lowest gas excise tax and the fourth lowest diesel fuel excise tax in the entire nation. Although many states subject gasoline sales to a sales tax, New Jersey does not. As a consequence, gasoline is cheaper in New Jersey than in neighboring states. Indeed, on February 2, 2002, New Jersey drivers paid an average of $1.03 for a gallon of regular gasoline that cost drivers in New York $1.23 and in Pennsylvania $1.13. Meanwhile, as the number of vehicles in New Jersey has increased, the amount charged to register a car in the state has gone down. The maximum amount the state now charges is $ $20 less than in When gas tax and car registration fees are calculated on a per capita basis, New Jersey ranks 48th at $105 (see Appendix A). Only Georgia and New York rank lower. Taxing motor vehicles - through the gas levy and registration fees - at rates below those of most other states causes a number of problems for New Jersey: Loss of valuable state revenues he need to find the money elsewhere for transportation improvements at a time of economic recession that increases pressure on the state budget Missed opportunities to improve the quality of life in this state by discouraging sprawl and pollution Clearly something is amiss: this is a state where commutes to work are among the nation's longest, and it has little to do with distance. It has mostly to do with congestion and the amount of time New Jersey drivers must sit in traffic. Keeping the price of gasoline lower than in neighboring states does nothing to discourage people from driving alone rather than take mass transit or carpool. State policy is counter-intuitive in another respect. In January, when the NJ Transit Board of Directors agreed to raise bus and rail fares, the move was defended in part on grounds that there had been no increase since By this logic alone, a gas tax increase is long overdue: the last gas tax increase was in three years before the NJ Transit hike. Indeed, all but four states have raised their gasoline taxes since New Jersey's last increase. GAS TAX THEORY 2 of 15 11/9/10 12:48 PM

3 The motor fuels tax and related motor vehicle fees represent a category of selective sales (also known as excise) taxes that are considered user fees. Instead of charging the general public for services that might be of use or interest only to some, such fees are designed to yield benefits to those who pay them. So, drivers are supporting the roads, bridges and other infrastructure they need through the gas taxes and registration fees they pay. Gas taxes and license fees were first imposed as a revenue source for road construction and maintenance in the 1920s. Public support for these taxes and fees was strong. Cars were immediately popular and the need for good roads was great. These taxes proved easy to collect and were related to usage. In theory, use of gas taxes and motor vehicle fees 1 offers several major advantages beyond paying for roads: Charging at an adequate level limits use of roads. This prevents waste in the form of traffic congestion and in the decisions people make to live a long distance from where they work and businesses to locate far from markets and resources. User charges help allocate traffic between roads and rail. If railways must cover more of their costs from their own revenue, but roads are largely financed by general tax levies, commercial road transportation is artificially favored. Financing by user charges avoids draining revenue away from other high priority functions. Support for user taxes in the US reflects the belief that only by this means could funds be obtained for rapid expansion of the highway system. From an equity standpoint, there is little justification for making the general taxpayer pay for a service that yields direct and immediate benefits to certain individuals so long as user charges do not result in unacceptable burdens on the lowest-income groups. 2 In practice, many experts have observed that the US has never used the gas tax to its full potential. Inadequate taxes and fees have encouraged long commutes in single occupancy cars. Some people, of course, drive long distances out of economic necessity; but others are responding to the low cost of doing so. Inadequate charges for driving have led people to live in more remote areas with no access to public transportation and have helped to encourage business to locate on suburban tracts where access is only by car. Arguably, because roads are free and gasoline is relatively cheap, people carpool less than they otherwise might and roads are more congested. GAS TAXES AND MOTOR VEHICLE FEES - A SHORT HISTORY The car's invention at the turn of the 20th Century 3 created the need for improved roads and bridges. State governments made major investments in the construction of streets and highways and, at the beginning, largely financed these improvements through property taxes and general state funds. But in 1919 three states - Oregon, New Mexico and Colorado - instituted a gas tax in order to help defray the expenses associated with road construction. 3 of 15 11/9/10 12:48 PM

4 The gas tax proved so productive and acceptable that by 1929 gasoline taxes were the main source of revenue for highway expenditures. By 1932, all states and the District of Columbia imposed gas taxes at rates between two and seven cents per gallon. During the 1930s and 1940s the gas tax was the most important source of state government revenue, yielding one-quarter or more of general tax revenues. The federal government first supported building a national system of roads with passage of the Federal Aid Road Act of The great growth in automobile registrations and the demonstration of the value of long-distance trucking during World War One led to passage of the Federal Highway Act of 1921, which provided aid for states to build a connected interstate highway system through fifty-fifty matching grants. The federal government in 1932 first imposed its own excise tax on gasoline, at a rate of 1-cent per gallon, to help erase a federal budget imbalance. The Depression in the 1930s sharply reduced federal revenues and significantly increased spending on relief and such public works projects as building roads. Though states strongly opposed encroachment on their now lucrative and relatively popular revenue source, the federal gas tax became effective in June 1932 with the provision that it would expire in June This, of course, did not happen. At the time of enactment, the proceeds of the federal gas tax - which in 1933 represented almost 8 percent of federal revenue collected from all sources - were not earmarked for road construction, but federal aid for road building and maintenance was continuously provided to the states. In the mid 1950s, Congress increased federal road-building aid, with revenues put into a new Highway Trust Fund. The Interstate Highway Act of 1956, the most ambitious public works program in US history, committed the federal government to pay 90 percent of construction costs for 41,000 miles of toll-free express highways. Not until 1973 was money from the Highway Trust Fund first used for urban mass transit. New York was the first state to require that owners register their cars. By states required motor vehicle registration, mainly to help identify speeders and reckless drivers. Because the general practice in most states was to use funds from registration fees for road improvement, motorists after 1905 came to accept higher and annual registration fees as a way to secure better roads. America's love for the automobile started in the 1920s. An article in Motor, an early automobile magazine, noted that in 1914 only 357,598 Americans earned enough money to pay federal income taxes, but almost 1.3 million owned motor vehicles. By 1927, a survey of car ownership conducted by the General Federation of Women's Clubs showed that 56 percent of US families owned an automobile and 18 percent of these families owned two or more. From the earliest days, driving and debt were closely linked: in 1922, 73 percent of cars were sold on the installment plan. A 1926 survey found the automobile commitments of California car buyers averaged 18 percent of monthly income. THE NEW JERSEY STORY 4 of 15 11/9/10 12:48 PM

5 New Jersey enacted a 2-cent per gallon excise tax on motor fuels in Over the next 75 years, New Jersey would raise its gas tax rate only seven times, most recently in Every state except Georgia, Alaska, Minnesota and Indiana has increased its motor fuel tax rates since New Jersey last did so. The following table shows New Jersey's gas tax over time. From their enactment until the mid 1960s, the motor fuels tax and motor vehicle fees were among New Jersey's most productive revenue sources. In Fiscal Year 1966, the motor fuels tax and motor vehicle fees were the top two sources of state revenue. The following year, the new sales tax immediately raised more money than any other state tax. The sales tax remained number one until Fiscal Year 1992, when gross income tax collections took the lead. New Jersey Motor Fuel Excise Tax Rates Since 1927 year gas tax per gallon cents cents cents cents cents cents cents In Fiscal Year 1972, the motor fuels tax and motor vehicle fees cents accounted for $366.8 million, almost 21 percent of the $1.751 billion in total general revenues collected by the state. In Fiscal Year 2000, these two sources brought in $889.5 million, about 4 percent of total state revenues. In that year, motor fuels taxes and motor vehicle fees were in fifth and sixth place as state resources after the gross income tax, sales tax, corporate business tax and transfer inheritance tax. In part, these changes reflect growth in income and sales tax revenues. But they also suggest that motor vehicles in New Jersey simply do not pay their fair share at a time when the state increasingly borrows money for transportation improvements. COMPARISON TO OTHER STATES All 50 states impose per gallon excise taxes on gasoline and diesel fuel. At 10.5 cents per gallon for gasoline and 13.5 cents per gallon for diesel fuel, New Jersey has the third lowest motor fuel excise tax rate in the nation. The only states with lower rates are Georgia (7.5 cents) and Alaska (8 cents). The table below compares the cost of a gallon of gasoline in New Jersey to neighboring states assuming that gasoline is $1.00 per gallon. To make the comparison meaningful, the numbers include motor fuel excise taxes and all other taxes included in the total cost of a gallon of gasoline in each of the above states. In New Jersey, that amounts to the 10.5-cent per gallon motor fuels excise tax and the 4-cent per gallon Petroleum Products Gross Receipts Tax. Cost of 10 Gallons of Gas at $1.00 Per Gallon State Gas Tax per Gallon Including all Excise Taxes Total Cost New York cents $ of 15 11/9/10 12:48 PM

6 Pennsylvania 26.6 cents Connecticut 25.0 cents Maryland 23.5 cents Delaware 23.0 cents Ohio 22.0 cents Massachusetts 21.5 cents New Jersey 14.5 cents States have the authority to determine how much to charge to register a vehicle and on what factors to base that charge. A few states have flat registration fees, charging the same amount with no regard for a vehicle's value, age or weight. It is more common, however, to include variables for value, age or weight-often in some combination-and to charge accordingly (see Appendix B). For example, 12 states have higher registration fees for cars that are worth more; 14 charge more for newer model cars; and 22 states have higher fees for heavier cars. Missouri is the only state to use vehicle horsepower as a registration factor. In addition, 24 states have some sort of personal property tax or vehicle license fee based on the value and age of the vehicle. New Jersey bases registration on a vehicle's age and weight and does not levy a personal property tax on vehicles. It cost $48.50 to register a new Toyota Camry and $73.50 to register a new Ford Explorer in New Jersey in That year, 16 states had higher registration fees than New Jersey for the Camry and 13 had higher fees for the Ford Explorer. The following table compares New Jersey with the four states with the nation's highest registration fees for those two vehicles. State Cost of Motor Vehicle Registration New Toyota Camry New Ford Explorer Wyoming $ $ Mississippi Minnesota Iowa New Jersey Source: New Jersey Snapshots and AAA 2001 Digest of Motor Laws All four states charging the most take into consideration the value of the vehicle - using either its factory price, base value of the vehicle as provided by the manufacturer when the vehicle was new or its list price - and its age when determining the registration fee. Iowa also includes a factor for the weight of the vehicle. A question can be raised as to whether New Jersey's system for determining registration 6 of 15 11/9/10 12:48 PM

7 fees is adequate and equitable. A 1987 report by the New Jersey State and Local Expenditure and Revenue Policy (SLERP) Commission discussed this issue in detail as it relates to heavy truck traffic. Many studies have indicated that the heavier a vehicle is, the more wear and tear it causes to roads. For trucks, the SLERP study indicated that lighter vehicles were paying a larger share of their costs than were heavier vehicles. A similar argument can be made for passenger vehicles as compared to light trucks and sport utility vehicles. In 1999, the five heaviest non commercial vehicles on the road, each weighing more than 5,400 pounds, were the Lexus LX 470, Toyota Land Cruiser, Lincoln Navigator, Chevrolet Suburban and Cadillac Escalade. All are classified as Sport Utility Vehicles, which means they are exempt from the federal fuel efficiency and air emission standards for cars. These vehicles get low gas mileage and have high purchase prices, ranging from $25,675 for the most basic Suburban to almost $56,000 for the Lexus LX 470. Data provided by AutoPacific, Inc., an automobile marketing research firm, indicate that owners of these vehicles have median annual household incomes that range from $90,000 for the Suburban to $250,000 for the Lexus. The point of this is that owners of these five vehicles now pay only $73.50 to register their cars in New Jersey if the car is new, or no more than two years old (see Appendix C). If these vehicles are more than two years old, the cost drops to $61.00 per year. Owners are charged a premium because their cars weigh more than 3,500 pounds. The owners of a new car weighing under 3,500 pounds would pay $48.50 in registration fees annually, that of an old car, $ An analysis by Consumer Reports of 176 new car models in 1999 found that 42 percent of those cars weighed over 3,500 pounds and almost half were SUVs, minivans or trucks. Since 1997, New Jersey has lowered the cost of registering certain vehicles (see Appendix D). Information provided by the Department of Transportation shows that registration fees between 1992 and 1997 ranged from $32.50 to $ The current range is from $25.00 (for a 32-year-old car weighing under 2,700 pounds) to $ In 1997, it cost $32.50 to register a five-year old Toyota Corolla; that fee now has increased to $ In 1997, it cost $93.50 to register a new Mercedes-Benz; it now costs only $73.50 to register that vehicle (if it weighs more than 3,500 pounds). THE GAS TAX IS REGRESSIVE - OR IS IT? The obvious point of this analysis is to suggest that New Jersey should increase both the motor fuels excise tax and the fees it charges to register vehicles. The numbers presented so far make it clear that a higher gas tax would not put New Jersey at a competitive disadvantage and that basing registration fees on a wider set of factors would help bring charges more into line with a vehicle's impact on the transportation infrastructure. An argument sometimes raised against such policy decisions is that higher taxes such as these place a disproportionate burden on the poor. Indeed, many economists would agree that a gasoline tax is regressive at face value, meaning that it takes a larger percentage of the income of low-income people than it takes of high-income people. 7 of 15 11/9/10 12:48 PM

8 Take the example of two families, each of which owns a Toyota Corolla. The Smith's annual family income is $18,000; the Park's is $90,000. If both families drive 15,000 miles a year and their car averages 30 miles per gallon, they would buy 500 gallons of gasoline a year. Assuming gas costs $1.00 a gallon, each family would spend $500 a year on gasoline. The $500 the Smith family spends on gas is 2.8 percent of their family income but it is only 0.5 percent of the Park family income. All things being equal, this example speaks for itself. An increase in the price of a necessity that is consumed by everyone at the same level clearly puts a greater burden on poorer people. But does everyone actually consume at the same level? In fact, car ownership correlates to income to the extent that, according to studies, between one quarter and one third of households with income below $15,000 do not own a car. A 1997 study 4 by Elaine Murakami and Jennifer Young inquired into travel patterns of low-income people in order to help them move from welfare into the labor force. They used data from the US Department of Transportation's 1995 Nationwide Personal Transportation Survey (NPTS) and estimated that about a quarter (26 percent) of low income households do not have a car compared to only 4 percent of other households. Their study also showed that: When low-income households do own a car, the car is quite old. The average car is 11 years old in low-income households compared to 8 years for other households. People from low-income households are more likely to walk to work and are more likely to use public transit - buses as opposed to trains - to get to work. People in low-income households are nearly twice as likely to walk for other than work activities as well. Because so many trips are made by walking, the space in which people in low-income households travel is more constricted than for others. For low-income single parent households, about 66 percent of trips are three miles or less. Despite having fewer vehicles, people in low-income households still make most of their motorized trips in private vehicles. But these trips are more likely to be made in a vehicle owned by someone else, like a friend or relative. John Pucher, a professor of transportation planning at Rutgers University, used the same NPTS data to show that 80 percent of households with annual incomes of less than $15,000 either own no car (32 percent) or own only one car (48 percent). In contrast, only one percent of households with annual incomes that exceed $80,000 are without a car. And nearly 90 percent of households with income above $80,000 own two cars or more. Marketing analysts do not spend much effort in determining what sorts of cars the poorest Americans drive. But the preferences of higher income households are well documented, with such factors as median household income, age, gender and marital status tracked for people buying new cars. Increasingly, people are buying light duty vehicles, the category including SUVs, pickup trucks and minivans. In 1998 this class of vehicles accounted for half of all new-car sales nationally. Most, if not all, of these light duty vehicles are purchased by mid- to high-income 8 of 15 11/9/10 12:48 PM

9 households. AutoPacific, a forecasting firm based in California, estimated that the median household income of the typical purchaser of a Lexus LX 470 is $250,000. The fuel usage of the LX 470, one of the heavier luxury sport utility vehicles, is less than 13 miles per gallon. And the federal Environmental Protection Agency has found that SUVs and other light duty vehicles burn 66 percent more fuel annually than passenger cars. It is starting to become clear, then, that the vehicles that cost the most and, arguably, take the heaviest toll on the roads upon which they are driven, are owned by the people best able to pay higher taxes and fees. In a 1991 paper, MIT economist James Poterba 5 concluded that the gasoline tax is less regressive than conventional analyses suggest because "low-expenditure households devote a smaller share of their budget to gasoline than do their counterparts in the middle of the expenditure distribution." His research suggests that low-income households that receive tax-indexed transfer payments - such as welfare - from the government might actually be better off with an increase in the gas tax. For such households, tax-induced changes in consumer prices are offset in time by higher payments. "For households with large gasoline expenditure, this offset [of the gasoline tax increase by higher transfer income] will be incomplete; for other households with little or no spending on gasoline and motor oil, the tax increase will yield an income increase with no offsetting change in the cost of living." Most importantly, Poterba suggests solutions to the impact of a gas tax on those less well off. "Many policies could be combined with a gasoline tax to alter the net distributional burden of a fiscal reform," he observed. "Expansion of the Earned Income Tax Credit, the Food Stamp Program, or explicit income tax credits for fuel expenditures are all possibilities. In 1990, the Congressional Budget Office and KPMG Peat Marwick both produced reports that addressed these issues. While none of these offset policies reaches all of the households affected by higher gasoline taxes, all could be used to partly blunt the distributional effects." CONCLUSION On the merits, the case is clear for New Jersey to increase its gasoline tax and create a car registration fee system that takes into account to a greater than it does now the impact that certain vehicles have on the road system and the income level of the people who own those vehicles. New Jersey should take the following steps: Raise the gasoline tax rate to 20.5 cents per gallon, an increase of 10 cents. This 10-cent increase would raise an additional $450 million in tax revenue. The artificially cheap price of gasoline not only means that transportation costs must be borne to a greater than advisable degree through means other than user fees, but it also encourages people to drive more, pay little attention to fuel efficiency and select heavier 9 of 15 11/9/10 12:48 PM

10 cars than needed. Change the car registration fee structure to include the value of the vehicle and raise fees on the heaviest, most expensive vehicles. In 2001, 16 states charged higher registration fees to register a new Toyota Camry and 13 states charged higher fees for a new Ford Explorer; 12 states include the car's cost when determining registration fees; 14 charge more for newer model cars; and 22 have higher fees for heavier cars. Data show that bigger, newer, higher value cars tend to be owned by higher income people who can afford higher registration fees. Use a substantial portion of the new revenue to improve and subsidize public transportation. Lower income people are more likely to walk or use public transit, most likely buses, to get to work than they are to drive. Studies show that 80 percent of households with incomes under $15,000 either own no car or only one car, while almost 90 percent of households with incomes over $80,000 own two cars or more. Use a portion of the increased revenues for programs to offset the impact on those most adversely affected by these additional costs. Currently, 9 cents per gallon from gas tax receipts is constitutionally dedicated to transportation expenses. The remaining 1.5 cents is reserved to pay off pre-1984 general obligation transportation bonds. A 10-cent per gallon gas tax increase should be allocated in similar proportion. Eight cents should be dedicated to transportation expenses including public transit subsidies and improvements. The remaining two cents should be used to offset the impact of this proposed increase on those who can least afford it. One cent per gallon should be used to provide a new $50 income tax credit available only to taxpayers with incomes of $30,000 or less. This would cover the cost of the gas tax increase for someone who buys 500 gallons of gas a year. That penny per gallon would generate $45 million in revenue; the cost of a $50 credit for the 930,000 people in this tax category would be $46.1 million. The other penny increase should be targeted for programs like the state Earned Income Tax Credit, transportation subsidies or childcare programs in recognition of the rising need for expenditures in these areas and the state's unwillingness to tap such other sources as the income tax. Motor vehicles today get the next best thing to a free ride in New Jersey. Registration fees and gas taxes are significantly lower than those charged by many other states. Through an increase in its gas tax and registration fees, New Jersey could finance creation of a first-rate public transportation system, reduce over-reliance on automobiles and expand benefits for people most in need while calling on those best able to pay to contribute more of their fair share. With statistical evidence strongly showing the merits of increasing the gas tax and registration fees in New Jersey, it seems clear that the barriers to such policy changes are 10 of 15 11/9/10 12:48 PM

11 political. Simply put, elected officials are afraid that if they support increases they will be criticized by opponents and voted out of office. New Jersey deserves better than fear-based policy. What's needed is an honest discussion about transportation needs in this state - about the costs of driving, who should bear those costs and how. Appendix A Motor Fuel and Motor Vehicle Collections by State 11 of 15 11/9/10 12:48 PM

12 Appendix B Factors Used to Determine Registration Fees 12 of 15 11/9/10 12:48 PM

13 Appendix C Motor Vehicle Registration Fees in 2001 in New Jersey 13 of 15 11/9/10 12:48 PM

14 Appendix D New Jersey Motor Vehicle Registration Fees Over Time 14 of 15 11/9/10 12:48 PM

15 End Notes 1. Turnpike tolls are also user fees but will not be part of this particular discussion. 2. This discussion is outlined in Government Finance: Economics of the Public Sector by John F. Due and Ann F. Friedlaender (1981) which details why excise taxes such as motor fuels taxes are appropriate methods for financing certain government services. 3. Much of this history comes from James J. Flink's book The Car Culture, published by MIT Press in Murakami, Elaine and Jennifer Young. "Daily Travel by Persons with Low Incomes." Paper for NPTS Symposium, Bethesda, Md. October 29-31, Poterba, James M. "Is the Gasoline Tax Regressive?" in D. Bradford, editor. Tax Policy and the Economy 5 (1991) pp This page URL: 15 of 15 11/9/10 12:48 PM