Efficiency and Distributional Effects of Illinois Gas Taxes

The current fiscal crisis in Illinois affects all parts of the state’s budget. Infrastructure is no exception. For many years Illinois has spent more on highways than it has collected in highway-related revenue. One solution to this problem is to increase the state’s gasoline tax. This report discusses the efficiency and distributional effects of increasing the state’s gas tax, and also compares a gas tax increase to alternative solutions such as increased use of tolls. The gasoline tax might efficiently reduce gasoline use and associated negative externalities such as pollution, but a tax on “vehicle miles traveled” (VMT) might be more efficient at reducing other negative effects of driving like congestion and accidents. Another alternative is increased use of tolls. If these tolls are set at higher rates during rush hour, they can be most effective at reducing the worst congestion. All of these alternative policies might have regressive distributional burdens, since low-income families spend a higher fraction of income on driving than do high-income families, but these “road user taxes” might be justified as a way to charge those who benefit from the use of roads in Illinois.