25 Cents Per Gallon Doubles Tax Revenue for Highways

By Danni Chen

In contrast to earlier this year, November has seen consecutive days of falling oil prices. This drop has led to lower costs for consumers at the pump. With the annual growth rate of investment in public infrastructure slowing, some have suggested that now is the time to increase the federal gas tax. Recently, a former Secretary of Transportation urged the Administration to seize the opportunity to raise the gas tax. In the past, President Trump has endorsed an increase of 25 cents per gallon. The last increase in the federal gas tax was a quarter century ago in 1993 to 18.4 cents per gallon.

Here, PWBM estimates the amount of additional revenue that is gained by increasing the gas tax by 25 cents per gallon. To estimate the impact of a larger gas tax on revenue, we use the Energy Information Agency’s (EIA) forecast of both retail gasoline price and gasoline consumption. We then adjust gasoline consumption in response to the increased after-tax price of gasoline based on elasticity estimates from the literature.1

The red line in Figure 1 is the forecasted retail gasoline price inclusive of all state and federal taxes, including the proposed 25 cents per gallon increase. Under current law, the federal gas tax is projected to raise an average of $23.7 billion per year from 2018 to 20282 and is represented by the dark blue area. The downward slope of the revenue area reflects forecasted changes to gas consumption due to both changes in the fuel efficiency of automobiles and gas price increases. We forecast the additional 25 cents per gallon tax will raise an additional $31.8 billion per year on average. With the increase, the federal gas tax will generate a total of $55.5 billion per year in average revenue, or $549 billion over the standard 10-year budget window.

Figure 1: Estimates of Federal Gas Tax Revenue Under Current Law and with New Tax and Gas Price with New Tax


  1. We use estimated elasticities from Coyle, David, Jason DeBacker, and Richard Prisinzano. “Estimating the Supply and Demand of Gasoline Using Tax Data.” Energy Economics 34, no. 1 (January 1, 2012): 195–200. In applying these elasticities, we assume that retailers pass the entire tax to consumers, which is a standard assumption consistent with the intense price competition in this market.  ↩

  2. CBO forecasts a slightly larger average of $24.2 billion per year over the same time period.  ↩

    ,Retail gasoline price with new tax,Additional revenue from new tax,Current law revenue,Total revenue with new tax