Oregon Started a Trend in 1919 with the Nation's First Gas Tax. Will It Do So Again?

In 1919, Oregon lawmakers were looking for a way to fund road construction and kicked off a national movement when they created the country's first tax on gasoline. Just over a decade later, every state and the federal government had implemented a gas tax, and it eventually became the most important funding source for the modern transportation network that exists today.

But the Oregon gas tax and the federal and state gas tax structures it influenced have been flawed from their inception. The fixed, per-gallon rates remain stagnant no matter the pace of inflation. In other words, even as the price of gas or the cost of building and maintaining infrastructure increases, the gas tax remains the same unless lawmakers take action.

Now, nearly a century later, Oregon will try to lead the nation once again with an experimental method of paying for transportation infrastructure. As of July 1, up to 5,000 Oregon drivers are now allowed to sign up for a program called OReGO that will exempt them from Oregon's gas tax on the condition that they pay a new tax based directly on the number of miles they drive.

The premise behind OReGO is sound. The average vehicle on America's roads can now travel 21.6 miles per gallon; that is 12 percent more efficient than the 19.3 mpg average from two decades ago. For a vehicle with a 15-gallon gas tank, this improvement means that average drivers are able to wear down the roadways with 35 extra miles of driving before they have to stop, refuel, and pay anything in gas taxes. This trend is still in its early stages, but the impacts on federal and state transportation budgets are starting to be felt. And with electric vehicles and highly-efficient vehicles likely to continue growing in popularity, flat-rate gas taxes will eventually become an even more unreliable way to pay for transportation.

By taxing drivers based on miles driven, OReGO's goal is to come up with a sustainable way of raising revenue for the transportation system even in a future where gasoline purchases (and gas tax revenues) may be sharply curtailed. But despite its good intentions, the program also contains a glaring flaw that is carbon-copied from the state's 1919 gas tax law.

Starting this year and lasting indefinitely, the tax paid under OReGO will be a constant 1.5 cents per mile. In the short-term a 1.5 cent-per-mile tax should raise roughly the same amount of revenue as Oregon's 30 cent-per-gallon gas tax. But our history with the gas tax has made it abundantly clear that revenues raised under a fixed tax rate will eventually come up short. For a project that is supposed to be all about long-run sustainability, writing a fixed tax rate of 1.5 cents into the law is shockingly short-sighted.

The problem is inflation. Over the last twenty years, the price of transportation construction has increased by 60 percent. This means that an infrastructure project costing $2 million in the early 1990s, for example, would cost closer to $3.2 million today after the higher price of asphalt, concrete, and machinery is taken into account.

This type of inflation is inevitable. And yet both Oregon's 1919 gas tax law and its 2015 OReGO program are set up as if prices will never change.

Even if we assume that transportation costs will rise by just 2 percent per year over the next decade, by 2025 Oregon's transportation taxes will have lost nearly a fifth of their purchasing power. Offsetting this loss will require raising the OReGO tax to 1.8 cents-per-mile and the gas tax to 37 cents-per-gallon.

Increasingly, states are planning ahead for inflation with respect to their gas taxes. Florida, Georgia, Maryland, Rhode Island, and Utah have all put their infrastructure budgets on a more sustainable path by writing automatic inflation adjustment formulas into their gas tax laws. Other states such as California, Kentucky, Pennsylvania, and Vermont do not consider inflation directly, but achieve a similar result by tying their gas tax rates to growth in gas prices.

All of these gas tax laws have had a larger practical impact than OReGO, and yet have received less national attention. Despite the hype suggesting that OReGO could be a model for governments in search of a sustainable infrastructure funding source, the fact remains that the tax, as currently structured, is completely helpless in the face of inflation. In that respect, things haven't changed much since 1919.