Nikki Haley’s Proposed Gas Tax Repeal Faces Flawed Criticism

It’s possible that no tax policy proposal has generated as much buzz on the presidential campaign trail or received more media attention than Nikki Haley’s proposal to repeal the 18.4 cents per gallon federal gas tax, which she laid out in a September 22 speech on economic policy.

“For starters, we’ll completely eliminate the federal gas and diesel tax,” Haley, the former UN Ambassador and two term governor of South Carolina, said during the speech. “That’s 18 cents per gallon in savings on gas and 24 cents on diesel. That will help families struggling with record high gas prices.”

“But killing the gas tax is just a modest beginning,” Haley added. “We’ll cut income taxes for working families. The middle class should have fewer brackets and lower rates.”

As expected, Haley’s proposal was criticized by Democrats, but some Republicans also came out against it. “As Governor, she tried to raise the gas tax on SC but now claims she will get rid of national gas taxes,” Congresswoman Marjorie Taylor Green (R-Ga.) tweeted in response to Haley’s proposal.

Congresswoman Green’s claim, however, is not accurate. In reality, then-Governor Haley said she was open to a gas tax increase that was a high priority for state legislators, but only if paired with income tax relief, which was her priority. South Carolina legislators at the time, both Republicans and Democrats, were only interested in a stand alone gas tax hike, hence no deal. The fact that South Carolina Democrats blamed Haley for their inability to enact a gas tax hike while she was governor underscores the inaccuracy of Congresswoman Green’s claim.

Yet the assertion made by Green and many other critics of Haley’s proposal is that support for a state gas tax increase would be contradictory or inconsistent with repeal of the federal gas tax. But, as Cato Institute’s Chris Edwards and Adam Michel recently wrote, supporting a state gas tax hike paired with a state income tax cut and then proposing repeal of the federal gas tax are policy proposals that “are entirely in sync,” adding that “states should have responsibility for highway funding, and we need to start reversing the increase in central control over infrastructure supported by many Republicans and Democrats.”

The American Enterprise Institute’s Kyle Pomerlau joined Marjorie Taylor Green in criticizing Haley’s tax proposal, albeit for different reasons. “Eliminating the gas and diesel tax would be unfair,” wrote Pomerlau. “Gas and diesel taxes are classic ‘user charges:’ taxes or fees that individuals or businesses pay related to a benefit they receive from the government. The purchase of gasoline and diesel roughly corresponds to the use of roads and highways. Eliminating these taxes and replacing them with general funds would shift the cost of road and highway spending onto all taxpayers, regardless of road use.”

“Breaking the link between taxes paid and the use of roads would also have negative efficiency consequences,” Pomerlau added. Haley’s proposal, however, does not necessarily move away from a user fee or “user charges” model, especially if coupled with a much greater role for state governments when it comes to transportation funding. In fact, many see Haley’s proposal as a way to move toward a system that actually increases the link between gas taxes paid and road use. Edwards and Michel explain how Haley’s proposal to repeal the federal gas tax could eliminate inefficiencies in the current transportation funding system:

“Federal gas tax revenues go into the Highway Trust Fund and then are dished out to the states to use on highway and transit projects,” write Edwards and Michel. “However, since 98% of the nation’s streets and highways are owned by state and local governments, it would be simpler and more efficient if those governments were responsible for the funding. Having the federal government raise the funds and then return the funds to the states with regulations attached is unnecessarily bureaucratic.”

Furthermore, the federal gas tax is not the “classic user charge” that Pomerlau portrays it to be. The federal gas tax falls short of a true user fee due to several challenges, all of which could be easier to address under Haley’s proposal.

The federal gas tax is paid by road users, but billions of gas tax dollars provided by those road users are subsequently diverted to public transit and other non-road projects. Nikki Haley alluded to these gas tax diversions in her September 22 speech, stating that in a Haley administration, “we’ll stop diverting money to green giveaways.”

“Road money should build roads,” Haley added, “not bike paths and hiking trails.” Not only is something closer to a true user fee for transportation funding achievable under Haley’s proposal, Edwards and Michel explain how her plan could also produce a more effective transportation funding system. In fact, a number of states have already proven they can end diversion of gas tax funds to non-road projects, while the chances of that happening at the federal level are slim.

The increasing use of electric and hybrid vehicles is another reason why the federal gas tax does not qualify as a true user fee. Hybrid drivers contribute fewer gas tax dollars per mile driven than gas-powered car drivers, while EV drivers pay no gas tax. Lawmakers in a number of states have responded to this disparity by raising vehicle registration fees for EV drivers.

“States have the best information to determine their local infrastructure needs. States that want to improve their highways can increase their own state‐level gas taxes, sales taxes, or user charges,” Edwards and Michel added. “Or they can issue debt or pursue full or partial privatization. The states have all the necessary fiscal tools to tackle their own infrastructure challenges.”

Haley’s proposed gas tax repeal has been attacked by Democrats, Republican politicians who have endorsed her opponents, and Washington think tanks. Their criticism has knocked Haley’s plan from various angles, but are all flawed for different reasons. What’s more, Haley’s proposal is likely to prove more popular with conservative and independent voters than it is with Washington think tank staff and opposing campaign surrogates.