A big argument against raising the gasoline tax to provide more money for transportation projects is that the gas tax, by its nature, affects low- and middle-income people more than it does the wealthy.
A solution Sen. Thomas R. Carper, D-Del., is promoting to try to rally support from both parties for the tax increase is to pair it with a more generous earned income tax credit, or EITC, which would benefit those same lower-income Americans.
But his effort faces resistance from Republican leaders.
Carper, a senior tax writer, said he was laying the foundation for a hybrid package aimed at attracting bipartisan support. Carper and other key players are eyeing potential endgame talks on a multi-year surface transportation bill if the parties can agree on a short-term extension of spending beyond the May 31 cutoff of the current extension of funding.
“I think we’ve got to do something. The idea would be to provide just some reasonable amount of money until one of these big ideas is enacted,” Carper said. He said lawmakers were reviving the idea of a gasoline tax increase, combined with income tax breaks, in the face of a potential stalemate over a number of other revenue-raising ideas, such as a proposal to replenish the Highway Trust Fund with higher income tax revenue from the repatriation of corporate profits now held overseas.
Sen. Dean Heller, R-Nev., co-chairman of Senate Finance Committee working group on community development and infrastructure, confirmed that a number of Republicans were examining the pairing of a gasoline tax increase with income tax breaks, but said they have been given a red light by Majority Leader Mitch McConnell, R-Ky., and his team.
“The problem is leadership doesn’t support it,” Heller said. Ryan Ellis, tax policy director for Americans for Tax Reform, a conservative watchdog group, said Republicans likely would insist on taking a revenue-neutral approach, meaning any gasoline tax hike would have to be matched by income-tax cuts.
Even if such a deal could be worked out, Ellis argued it would be hard to sell in both chambers. He pointed to the overwhelming defeat by Michigan voters on May 5 of a ballot proposal that would have tied a state-backed increase in the EITC to a proposal to raise several state levies, including the state gasoline tax.
“It’s a radioactive tax to raise,” Ellis said.
Despite the pushback from GOP leaders and conservative groups, Carper said he was continuing to try to frame a gasoline tax raise paired with income tax incentives as a way of financing a multi-year highway bill.
Carper said some Republicans had floated the idea of pairing a higher gasoline tax with a temporary cut in the 10 percent rate for the lowest personal-income tax bracket.
“What some have suggested is that we lower the 10 percent rate for one year to 5 percent. The next year it would go to 6 percent, the next year to 7 percent, the next year to 8 percent, and then finally back to 10 percent after five years,” Carper said.
Sen. Bob Corker, R-Tenn., said the idea of cutting the 10 percent rate resembled a trial balloon he floated last year, but he said he wasn’t promoting it for now. “I don’t get the sense at present that the gas tax increase has any traction,” Corker said.
But the estimated $175 billion cost of such a proposal has raised concerns among deficit hawks in both parties. Carl Davis, a senior analyst for the Institute on Taxation and Economic Policy, a progressive think tank, predicted fights over both the cost and shape of any income tax cuts would pose hurdles to any gas-tax initiative.
“The idea of pairing a gas tax increase with income tax cuts could be appealing to lawmakers in both parties. In the abstract, it might make sense. But in reality, there could be a lot of disagreement over how to structure those income tax cuts,” Davis said.
Regardless of whether there is an agreement on across-the-board income tax cuts, Carper said he and other Democrats would insist on pairing any gas tax increase with tax incentives for low-income families, such as an expanded refundable earned income tax credit.
Chad Stone, chief economist for the Center on Budget and Policy Priorities, a liberal think tank, said targeted sweeteners were warranted by the uneven effect of lifting prices or levies at the fuel pump.
“Low- and middle-income households are more likely to feel the impact of higher gasoline taxes than higher income households, so any offsets should be targeted to them,” Stone said.
While pushing for a bigger tax credit, Carper said a potential gas-tax package also might include so-called program integrity measures aimed at averting fraudulent EITC claims, and might be structured to put a time limit on any gasoline and income tax changes.
For example, Carper said any gasoline tax hike — or income tax breaks — could be tailored to remain in effect only until lawmakers enact an alternative revenue source to provide sufficient support to the Highway Trust Fund.