Taxing Transportation Is One Great Way to Reduce Carbon Emissions

This column originally ran in Bloomberg Tax.

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Federal, state, and local tax codes are important but underused tools that can create a more climate-resilient, less carbon-emitting America. A modernized tax code would stop subsidizing emissions and instead encourage lower-carbon design. Because cars and trucks produce roughly one-fourth of US greenhouse gas emissions, transportation taxation is a great starting point.

Gas taxes encourage buying more efficient cars and driving less, while raising revenue to maintain transportation infrastructure and make it more sustainable. We can update this proven idea for a warming planet.

The federal gas tax’s purchasing power has been shrinking since October 1993, still stuck at 18.3 cents per gallon after 31 years and reduced further each year by inflation. This is bad policy and there is precedent for a better approach. President Ronald Reagan signed a bill more than doubling the rate in the 1980s, and former Presidents George H. W. Bush and Bill Clinton also increased the tax.

The longer wait and deeper erosion now means at least tripling the rate to keep up. This would boost revenue for roads, bridges, and train tracks at a time when storms are taking a heavy toll on all three. A robust gas tax encourages people to use more fuel efficient, less carbon-emitting forms of transportation and also helps pay for roads, which it makes sense to have drivers pay.

Gas taxes are the most important state-level revenue for transportation infrastructure, but many states have let them erode. Still, forward-thinking states show the viability of a smarter approach. Twenty-three states and Washington, D.C., adjust their gas taxes regularly using inflation, gas prices, highway costs, or another measure. Another seven states have updated their gas taxes in the last five years.

States should ideally raise their gas taxes to make up for past erosion then link them to highway construction costs or the consumer price index. This would generate more consistent funds for roads and transit and let drivers pay more of the costs driving imposes on infrastructure and the environment. Sending some of that revenue to transit will enable more buses, trains, and drivers, allowing more frequent service and higher rider satisfaction.

While gas taxes are important, vehicles are using less gas, even with many more of them on the road. This is excellent for emissions. But it means gas taxes can no longer be the prime revenue source for transit and roads.

Proven policies can be tweaked in the right direction: Forty-five states levy a flat sales tax on new vehicles. By charging a higher rate for gas guzzlers and heavier cars, and a lower rate on lighter and more efficient models, states could encourage greener choices at point of purchase.

Vehicle-delivery fees can help raise revenue and pay to deal with the congestion that home delivery can create. These vehicles are often electric, yet the roads they use are funded by that ever-shrinking gas tax.

Though not a tax, Colorado and Minnesota are generating revenue through such fees. If more states do the same, we may even be able to help restore balance with sometimes locally owned brick and mortar businesses—both Minnesota and Colorado exempt retailers with modest profits from the fee.

Congestion pricing— already in effect in London, Stockholm, and Singapore—can be used here in the US to help reduce emissions and encourage walkability. New York Gov. Kathy Hochul in June blocked New York city’s long-planned congestion pricing at the moment of implementation. But such programs get people out of cars and onto bikes and buses while raising much-needed revenue.

In Stockholm, congestion pricing prompted a 20% decrease in traffic, and the city brought in $92 million for public transit. In London, 20-plus years of congestion pricing has reduced congestion by 30% and increased walking, biking, and public transit use. Public health bonuses include cleaner air, safer streets, and more ability to be outside.

US cities should model programs similar to those in Stockholm and London to reduce congestion and increase vibrancy on this side of the ocean. These largely state and local approaches to taxing transportation would build on ways that federal policymakers have begun “greening” the tax code—the Inflation Reduction Act is a prime example.

Taxes, usually constructed under a very different energy environment than today’s, rarely incorporate the full costs to society from carbon emissions—but emissions create more storms and make them infinitely more deadly. We should use this moment to make tax policy reflect new climate realities.

We are running out of words to describe how this season’s natural disasters—most recently Hurricanes Helene and Milton—are devastating our communities. What remains plentiful are tax policy options for reducing carbon emissions, promoting energy efficiency, and raising revenue to invest in greener communities.

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