1. Running head: MOTOR FUEL TAX Grace K. Erickson
Motor fuel tax: Funding Nebraska’s transportation system in times of inflation
The State of Nebraska passed Legislative Bill 610 (LB 610) on May 14, 2015, but not
before being vetoed by the red state’s governor, Pete Ricketts, following with an overturn of the
veto by the unicameral legislature (Nebraska Legislature, LB610 - Change motor fuel excise
taxes, 2015). One may wonder what made this bill controversial to the extent of being vetoed
and then overturned. For Governor Ricketts, the controversy stemmed from the six cent
incremental motor fuel tax proposed by the bill (Duggan, 2015). The bill will add one and a half
cents to the gas tax over the span of four years. The revenue earned from the tax will be
appropriated to the Nebraska Department of Roads as well to the state’s cities and counties to
support the state’s road infrastructure (Nebraska Legislature).
The nature of the tax is that of a fixed rate, as it is a set fee that is added to the price of
gas, rather than being based on a percentage of the price of gas. Inflation could essentially cause
the prices of gas and transportation infrastructure to rise; the nominal value of the tax would
remain unchanged as the real value declines. O’Connell and Yusuf (2013) consider a fixed rate
fuel tax to be unsustainable as a source for generating revenue, as revenue is sure to decline with
inflation.
Today’s tax on motor fuel serves a dual purpose. First, incremental tax increases on fuel
can be based on the need of transportation infrastructure (O'Connell & Yusuf, 2013). The
revenue gained from the tax is returned to the public through an improved transportation system.
The second purpose for the consumption tax is to correct the externality of carbon emissions that
increase with vehicle use and contribute to climate change. (Sterner, 2007). Gruber (2013)
indicates that as global warming has a flat marginal benefit curve, price mechanisms, such as
taxation, would be the appropriate means to regulate the production of that externality.

2. MOTOR FUEL TAX Erickson 2
Do these purposes conflict? At a first glance, one might say yes; however, one should
consider the effects of the real value of the tax in a case of inflation. Gruber (2013) says that as
the price of a good rises above equilibrium, the demand for that good falls. In application of this
theory to Nebraska, if the price of gas rose due to inflation on gas prices, there would be less
demand for gas, followed by less need for the transportation system, resulting in lower carbon
emissions. Ironically, while this outcome is somewhat able to accommodate for both purposes of
the gas tax, it’s has nothing to do with the tax and everything to do with inflation. If the fuel tax
was to fluctuate per a variable rate, the scenario would then result in less demand for a well-
funded transportation system, as gas prices would be even farther above equilibrium, and carbon
emissions would lessen.
Per the scenario above, high revenues in the case of inflation could potentially lesson the
need for the transportation infrastructure, while still fulfilling the purpose of reducing carbon
emissions. O’Connell and Yusuf (2013) provide a way to improve this inefficiency by arguing
that even when taking into account inflation, the financing of the transportation system via fuel
tax needs to be further “restructured to be directly connected to measures of need”, taking into
account the fluctuating cost of producing the transportation system (p. 229). The authors argue
that fuel efficiency must also be taken into the account when setting the rate. O’Connell and
Yusuf claim that even when the rate is variable, “legislatures could set a limit on the size of a
rate increase, which most states with variable-rate structures already have in place”, which would
involve annual rate increases determinant upon the inflation of both gas prices and transportation
costs, but also based upon fuel efficiency and the level of need (p. 239).
The fuel tax isn’t the only measure that has been taken to lower carbon emissions.
Technological advancements have enabled an increase in production of fuel efficient vehicles,

3. MOTOR FUEL TAX Erickson 3
raising the demand for adequate roads, as drivers are able to get more for their gallon (Duncan,
Nadella, Bowers, Giroux, & Graham, 2014). For this reason, Duncan et al. introduces a mileage
user fee as another option to increase revenue for transportation projects. The authors assert that
this fee could also take into account the level of pollution created by the vehicle; each vehicle
would be charged on a mile per mile basis, with the rate dependent upon the level of carbon that
is emitted by the vehicle. Again, this price mechanism serves a dual purpose, as it benefits road
infrastructure while simultaneously correcting the externality that is created by the industry of
which the revenue generated by the fee supports. It is not clear whether or not the authors
propose that the mileage user fee be used in conjunction with the traditional fuel tax. The
authors acknowledge that the gas tax is not variable in respect to inflation, but they don’t indicate
whether the mileage user fee would be variable or fixed.
Landers (2009) also discusses the mileage-based user fee, and notes that the National
Surface Transportation Infrastructure Financing Commission (NSTIFC) supports that the fee be
used in place of the current gas tax system. Landers also reports that the number of miles
travelled by heavy trucks is growing at a more rapid pace than is the number of miles travelled
by automobiles. For this reason, Landers states that the NSTIFC advised Congress to “raise the
gas tax and diesel tax by respectively 10 cents and 15 cents per gallon and then index these rates
to inflation” as a temporary measure to suffice until the commission’s sustainable option of
choice, the mileage fee, can be implemented (p. 31). The bill passed in Nebraska, however,
stipulates a tax on motor fuel, and not diesel, regardless of the fact that Interstate 80, notorious
for heavy truck traffic, extends across the entire state (Nebraska Legislature, Nebraska Revised
Statute 66-489, 2015).

4. MOTOR FUEL TAX Erickson 4
The findings of this analysis indicate that a fuel tax is needed to support road
infrastructure, and can also be used to correct externalities, such as carbon emissions, that
ironically derive from the former. Arriving at equilibrium, one may find the balance with a tax
that lowers carbon emissions while causing neither a surplus nor deficit of transportation system
funding.
Some predict that taxes may eventually be adjusted to accommodate traffic increases that
would result on the growing presence of high efficiency vehicles, as cited in this analysis. High
efficiency vehicles, however, do not necessarily warrant an increase in traffic. Gruber (2013)
argues the principle of diminishing marginal utility, essentially meaning that each gallon of gas
provides less utility than the former.
The State of Nebraska should adopt a variable rate, fluctuating annually, as to adjust to
inflation of both gas prices and transportation infrastructure. Examination of the LB 610 Fiscal
Note (2015), Nebraska average gas prices, and the National Construction Cost Index shows how
prices have varied over the past four years, and may be used to make assumptions on future
inflation ramifications. The Federal Highway Administration (2015) has been tracking the
inflation on construction costs for twelve years, seeing an increase of about 8.1 percent from
March of 2011 to July of 2015. In application to Nebraska’s bill, the fiscal note for LB 610
projects $69,924,000 in revenue for fiscal year 2018-19 at the height of the incremented six-cent
tax increase, anticipating the purchase of approximately 687,982,885 gallons of motor fuel
within the state for that year. Per the Nebraska Energy Office (2015), Nebraska’s average gas
price in March of 2015 was $2.74 per gallon, meaning Nebraska’s fixed rate before the bill was
passed, .103 cent, accounted for 3.76 percent of that price. Another 8.1 percent inflation increase
would result in an index rating of 1.225, which would merit a $0.62 rise in Nebraska’s average

5. MOTOR FUEL TAX Erickson 5
price per gallon of gas by 2019. The entirety of the tax in fiscal year 2019-20, including the six
cent increase, would account for 4.69 percent of the revenue generated from the consumption of
motor fuel within the state, about 42 percent lower than what it would need to be to
accommodate rising construction costs within the state, but could vary upon need of
infrastructure.
In conjunction with the taxation of motor fuel, legislatures in Nebraska should consider
adding a tax on diesel, dependent upon the percentage of heavy trucks that pass through the state
each year. A tax on diesel could perhaps suffice for the 42 percent of revenue that will be
lacking due to the fixed rate tax on motor fuel that Nebraska currently has in place.
States, including Nebraska, will have to assume a motor fuel tax as a main source for
local roads funding until the wheel has fully been reinvented to allow the implementation of a
more sustainable approach. Passing LB 610 was a good first step for Nebraska. Without a
doubt, carbon emission considerations will govern future policy and culture, effecting mobility,
directly or indirectly. The sooner that states like Nebraska assume this legislation, as
controversial as it may be, the better off the health of their economies.

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References
Duggan, J. (2015, May 15). In a defeat for Gov. Ricketts, Nebraska's gas tax will be going up.
Omaha World-Herald. Retrieved from http://www.omaha.com/news/legislature/in-a-
defeat-for-gov-ricketts-nebraska-s-gas-tax/article_fee7547a-fa73-11e4-9214-
97066e91f6f9.html
Duncan, D., Nadella, V., Bowers, A., Giroux, S., & Graham, J. (2014). Bumpy designs: Impact
of privacy and technology costs on support for road mileage user fees. National Tax
Journal, 67(3), 505-530. Retrieved from http://0-
go.galegroup.com.skyline.ucdenver.edu/ps/i.do?id=GALE%7CA382428735&v=2.1&u=a
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Federal Highway Administration. (2015). Construction cost trends for highways. Retrieved from
https://www.fhwa.dot.gov/policyinformation/nhcci/pt1.cfm
Gruber, J. (2013). Public finance and public policy. New York: Worth Publishers.
Landers, J. (2009). Commission calls for mileage-based user fee, gas tax increase. Civil
Engineering, 79(5), 30-32. Retrieved from
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Nebraska Energy Office. (2015). Average monthly retail motor gasoline prices in Nebraska.
Retrieved from http://www.neo.ne.gov/statshtml/97.htm

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Nebraska Legislature. (2015). LB610 - Change motor fuel excise taxes. Retrieved from
http://nebraskalegislature.gov/bills/view_bill.php?DocumentID=25305
Nebraska Legislature. (2015). Nebraska Revised Statute 66-489. Retrieved from
http://nebraskalegislature.gov/laws/statutes.php?statute=66-489
O'Connell, L., & Yusuf, J. (2013). Improving revenue adequacy by indexing the gas tax to
indicators of need: A simulation analysis. Public Works Management & Policy, 18, 229-
243. doi:10.1177/1087724X12451575
Sterner, T. (2007). Fuel taxes: An important instrument for climate policy. Energy Policy, 35(6),
3194-3202. doi:10.1016/j.enpol.2006.10.025