Beginning July 1, Illinois residents will see a small increase in gas prices as the state implements a new motor fuel tax rate of 47 cents per gallon—a 3.5% increase from the previous per gallon rate of 45.4 cents per gallon. This constitutes a 147% increase over the last seven years.
Illinois Motor Fuel Tax
The Illinois motor fuel tax, established in 1977, is levied on the distribution and supply of motor fuel. The tax has been periodically adjusted to align with the state’s evolving infrastructure needs and inflationary pressures.
The latest increase is part of a larger program by Governor JB Pritzker, called the Rebuild Illinois Capital Plan. The program aims to invest $44.8 billion over six years, targeting roads and bridges, railway grade crossings, aeronautic facilities and port improvements.
Illinois already has the second highest state gas tax, trailing only California—and the July 1 increase will put the former within four cents of California’s lead rate of 51 cents per gallon.
General Rationale Behind Gas Taxes
A primary reason for increasing gas taxes in most states is to allocate funding for infrastructure development and maintenance. Roads, highways, bridges and public transportation require investment to ensure safety—and targeted funding sourced from gas taxes allows states to address the wear and tear on infrastructure caused by vehicles. The gas tax is thus a somewhat-attenuated tax on the use of infrastructure.
Gas taxes are often keyed to inflation, as is the case in Illinois, through the Consumer Price Index. Indexing ensures the revenue generated from the tax keeps pace with the rising cost of the maintenance—as construction materials, labor and other expenses rise, there needs to be a corresponding increase in revenue to meet those demands.
In recent years, increasing gas taxes have also served as a policy tool to encourage more environmentally-friendly transportation costs. Higher fuel costs can incentivize consumers to consider transportation they may not have otherwise—from public transportation to more fuel efficient or electric vehicles.
Investing in infrastructure through revenues generated by gas taxes can also have a positive impact on job creation. In this way, it can be seen as a tax on the oil and gas industry, with some of their profits allocated towards construction projects—from maintenance to new development. Infrastructure projects can create substantial employment opportunities which inject an economic multiplier effect—improving infrastructure and employing taxpayers, which generates more tax revenue.
Internalizing Costs
One motivating factor behind many state gas tax increases is the internalization of costs otherwise externalized to society. Put differently, when a barrel of oil is refined, sold as gasoline, and burned in a vehicle, there are costs that are not accounted for in each transaction down the production chain. Most obviously, the cost of the damage to the environment is not considered or paid for.
The cost of the CO2 emission from a barrel of oil is $77.70, and each barrel of oil represents approximately 19 gallons of gasoline. This places the CO2 cost at approximately $4 per gallon of gasoline.
What this means is that for every gallon of gasoline burned, a bill is shifted to society for carbon cleanup and the deleterious effects from atmospheric carbon, in the amount of about $4. Put simply, the oil and gas industry is subsidized by taxpayers in the amount of about $48 per tank of fuel for a small car, or $60 for a larger one.
In sum, raising gas taxes is a multifaceted policy tool intended to provide funding for infrastructure development, support environmental goals, and internalize externalities created by the oil and gas industry.
While rates continue to rise, they continue to fall far short of the actual cost to society.
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