Saturday, October 19, 2019

MassBudget: Gas Tax Hikes May Challenge Long-Term Revenue Sustainability and Equity

Gas Tax Hikes May Challenge Long-Term Revenue Sustainability and Equity
Read Our Latest Report Examining The Pros and Cons of Higher Gas Taxes

Raising Massachusetts tax revenue by increasing the state's gas tax would hit low- and moderate-income residents hardest and may be a shrinking source for the state's long-term transportation goals. If policymakers decide to increase the gas tax, its impact could be offset with tax credits for low-and moderate-income households.

Our latest report, The Pros and Cons of Higher Gas Taxes, and How They Could be Offset for Lower-Income Families, models how an increase to the state's Earned Income Tax Credit (EITC) can create a financial buffer for low- and moderate-income families that would be most impacted by an increased gas tax. For example, a 10-cent increase in the gas tax, now at 24 cents, could be offset by an 8 percentage point increase in the EITC, which would benefit families in the lower 40 percent of household earnings. Net revenue to the Commonwealth would be lower, but the financial impact on lower-income households would be offset by the tax credit.

Among the report's highlights:
  • A 10-cent tax increase would represent almost 0.20 percent of income for the lowest-income fifth of households, while households with the highest-income 1 percent of incomes would contribute less than 0.001 percent of their income in gas taxes.
  • Offsetting the impact of a 10-cent gas tax increase on lower-income families would require an 8-percentage point increase to the state EITC match, reducing the revenue gain by $75 million.
  • Including all state and local taxes and fees, the U.S. average gas tax nationwide is 36.17 cents - almost 10 cents above the Massachusetts total rate of 26.54 cents.
  • The number of gallons of gasoline taxed in Massachusetts used to grow substantially faster than the population. For the last two decades the number of gallons taxed per person has declined.
The Earned Income Tax Credit (EITC) is a refundable tax credit for low-income working families that supports about 400,000 households in Massachusetts. "This paper identifies how increasing the Earned Income Tax Credit could support low-income families who'd otherwise bear the greatest brunt of a gas tax increase," said Stephanie Ettinger de Cuba, Executive Director of Children's HealthWatch.  "The EITC is one of our most successful programs at keeping working families out of poverty, with large benefits for children's health and education and maternal mental health. If the increase to this program was large enough, it could be a win-win."

There has been discussion in recent months about a potential increase to the gas tax, last increased in 2013. "Transportation for Massachusetts supports a 25-cent gas tax increase to improve roads, bridges, and transit statewide. To help address equity concerns, it makes sense to pair this increase with low-income tax credits such as a stronger state EITC," said Chris Dempsey, Director of the Transportation for Massachusetts advocacy coalition.

The Massachusetts Budget and Policy Center (MassBudget) produces policy research, analysis, and data-driven recommendations focused on improving the lives of low- and middle-income children and adults, strengthening our state's economy, and enhancing the quality of life in Massachusetts. Connect with us on Facebook and Twitter.
Massachusetts Budget and Policy Center, 1 State Street, Suite 1250, Boston, MA 02109

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