The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
2020 will be memorable for many reasons. One of the most notable events to occur this year is the COVID-19 pandemic and how decision-makers are referencing the Spanish flu from a century ago. Just over 100 years ago, the world was not only at war with a disease but also with each other. World War I was raging, and with its small military, the United States was unprepared for such a large-scale event. In response, the United States imposed a federal excise tax (FET) to raise money for the war effort. Everything from cars and trucks to buses and motorcycles came with a 3% federal levy.
By 1924, the economy was booming, and Congress repealed most wartime taxes to include the FET. 1932 and the Great Depression brought decreased federal revenues so Congress reinstituted the tax at a 2% rate. World War II would see the rate increased to 5%, the Korean War to 8%, the Federal Interstate System of the 1950s to 10% and finally, in 1982, to the 12% we see today. The original 1975 tax bill that voted for a repeal made it through the Senate but not the full Congress. Since that time, the FET has been extended six times (1987, 1991, 1998, 2005, 2012 and 2015). Unless extended by legislation in the next transportation infrastructure bill, the FET will expire in 2022. As of today, the FET is deposited into the Highway Trust Fund (HTF), which pays for the maintenance of roads and highways. 2019 saw this fund take in $44.5 billion with $5.3 billion of that being from FET and $32.2 billion from gasoline taxes.
Bigger government means higher taxes
Gale & Samwick state in their 2014 article that “higher after-tax rewards induce more work effort, saving, and investment.” Knowing that taxes can stifle company growth, why would government maintain and increase taxes? One thing government is known for are the short-sighted decisions made to calm the loudest constituents. When a new social program or subsidy is promised, the money needs to come from somewhere, so they raise taxes (World War I=first trucking FET). Since the big government of the Great Depression reinstated the FET, federal taxes and expenditures have only increased. If the FET were repealed, the government would need to reduce impact on the budget.
Average cost of heavy-duty tractors
According to Sean Kilcarr’s article, the average cost of a heavy-duty tractor is $110,000 to $125,000 while trailer prices vary between $30,000 and $50,000. Quick math on these two numbers shows a 12% tax costs $14,040 for a truck and $4,800 for a trailer. These federal costs are in addition to the state and local taxes that companies are having to pay as well on new equipment.
Knowing what carbon dioxide emissions do to the environment, government regulators have instituted more regulations in recent years to curb emissions. 2016 brought the EPA’s Greenhouse Gas Initiative (GHG2). This required new trucks and trailers to have increasingly better fuel efficiency in progressive years. The final goal for trucks is a 24% lower CO2 emission rate and 8% lower emission rate for trailers. With higher safety and environmental standards being required, many trucking companies are not able to keep pace. In the first half of 2019 alone, 640 freight companies with 20,000 trucks closed their businesses.
Companies have a difficult decision to make when upgrading their fleets. If they want to stay in business, they’ll need to purchase a more expensive, safer and efficient truck (or trailer). But with this purchase comes the $3,000 to $22,000 federal tax. When business taxes are reduced, it has been proved that companies have the ability and will invest more in themselves.
Going forward, the United States is requiring safer and more fuel-efficient trucks. As the transportation equipment is being required to adjust with the changing times, tax laws should follow suit. Throughout the history of the FET, it has been used to support war efforts and government programs, as well as to build interstates and now to maintain roads. By updating this tax law, the United States can increase highway safety, support freight businesses, help companies through the COVID-19-caused recession and expand American manufacturing. House Bill H.R. 2381 is a current bipartisan push by Congress to repeal the FET. All of those in favor of a free market economy should support it.