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Infrastructure

States Raising Gas Taxes for Road Revenues

DALLAS Governors and state lawmakers searching for ways to reinvigorate their transportation funding in 2015 are focusing on the gasoline tax, with a flurry of new highway revenue proposals aimed at increasing collections from the long-time main source of highway spending.

"Gasoline tax hikes are one of the biggest trends we're seeing this year," said Carl Davis, a senior analyst at the Institute of Taxation and Economic Policy. "That's not surprising because revenues are falling short, and states are trying to catch up."

Gasoline tax proposals are on a three-year roll, Davis said, after no state gasoline tax increases in 2010 through 2012.

"We went for years without any state raising its gasoline tax, and this year we might see a dozen of them at least taking a serious look at adjusting their gas tax," he said.

Six states and and the District of Columbia raised their gasoline taxes in 2013 and three more states did so in 2014, Davis said.

"The interest in the gas tax is not unexpected," he said. "State transportation funds supported by current gasoline taxes just aren't keeping pace with the demand for infrastructure."

Higher state gasoline taxes are among the more than 90 measures relating to transportation funding on the table in 26 states, according to a recent report by the American Road & Transportation Builders Association's Transportation Investment Advocacy Center.

State officials are acting while Congress has so far failed to find a solution for the revenue shortfall in the chronically insolvent Highway Trust Fund, said ARTBA's chief economist Alison Premo Black.

"Governors and state legislators recognize the negative impacts of deteriorating road and bridge conditions on the local economy, safety, and mobility, and are taking action to fix the problem," Black said. "At the federal level, Congress should be taking a similar approach to finding a permanent solution for the Highway Trust Fund before highway and transit program funding expires at the end of May."

Federal transportation funding could be curtailed and delayed during the prime summer construction season if Congress doesn't pass a new surface transportation funding bill by May 31. The likelihood of another short-term extension increases if the deadline approaches with no consensus in Washington on funding a multiyear surface transportation bill.

Every state and the District of Columbia have a motor fuels tax on gasoline and diesel fuel, a trend that began with the first gas tax in Oregon in 1919. The first federal gasoline tax was levied in the early 1930s at 1 cent per gallon, and revenues from it helped build the Interstate Highway system in the 1950s and 1960s.

But gasoline taxes have faltered in the past 10 years as more fuel-efficient cars hit the roads at the same time that motorists cut back on their mileage and construction costs rose steadily.

Between 2002 and 2012, annual revenues from the federal gas tax fell by $15 billion, or 31% in real terms when accounting for construction cost inflation, Pew Charitable Trusts said in a report on state gasoline taxes. At the same time, state fuel tax revenue dropped by $10 billion, or 19 percent. States sales taxes on new and used vehicles, which are a major source of transportation funding in many jurisdictions, also sagged by $8 billion a year, or 21%, between 2002 and 2012 after adjusting for inflation.

The structural imbalance in the federal Highway Trust Fund created by the faltering gasoline tax and the numerous short-term extensions of federal funding is putting pressure on state transportation spending, said Richard Auxier, a policy analyst at the Urban Institute.

"The situations at the national and state levels are related," he said. "It's the same problem: The fuel tax base is eroding."

There was no need to increase federal or state gasoline taxes, or link them to inflation, while gasoline tax revenues rose steadily for almost three decades, Auxier said.

"From the mid-1970s through the early years of the 21st century, Americans drove more miles and bought more gasoline every year," he said. "State and local governments got a free ride, but habits began to change and by 2005 that was over."

With their current gasoline tax no longer paying the bills, states have few options, Auxier said.

"They can raise the gas tax rate, find some other source of revenue, or cut back on transportation spending to the level supportable by the gasoline tax," he said. "Cut backs aren't going to happen, other revenue sources such as vehicle miles traveled are at least a decade away, so that leaves gasoline tax increases as the preferred option."

If the federal tax had been linked to inflation with regular increases, Auxier said, the HTF wouldn't be in such a dire situation.

The federal tax has remained at 18.4 cents per gallon since Oct. 1, 1993. Since then, 22 states have raised their gasoline tax rate by more than 5 cents per gallon, including 11 of more than 10 cents per gallon.

However, 16 states haven't raised the tax in more than 20 years, and Alaska hasn't increased its 8 cents per gallon tax in 45 years.

States often take differing approaches to generating additional revenue for transportation needs, said Phil Oliff, a policy expert at The Pew Charitable Trusts.

"Virginia completely eliminated its per-gallon tax with a sales tax on the wholesale price of gasoline, while just across the Potomac River, Maryland decided instead to link its gasoline tax to inflation and added a sales tax component," Oliff said.

Iowa is the latest state to raise its motor fuel tax with a 10 cent per gallon increase on gasoline and diesel as of March 1.

Other states - including Georgia, Michigan, Minnesota, Montana, Nebraska, South Carolina, South Dakota, Utah, and Washington state -- are considering legislation that would increase their per-gallon gasoline tax or the state sales tax on gasoline, ARTBA said. Texas lawmakers are likely to dedicate a portion of vehicle sales taxes to road projects.

Proposed legislation in Arkansas, Iowa, Missouri, and Utah would convert the flat-rate state excise tax on gasoline to a variable-rate tax to capture more revenue for highways. Kentucky and North Carolina, which have variable-rate gasoline taxes, could limit the levy if gasoline prices fall below or rise above specified levels.

Transportation bond proposals are on the table as part of the infrastructure funding mix in seven states - Connecticut, Georgia, Minnesota, New Mexico, New York, Washington state, and Wisconsin.

Connecticut, New Hampshire, New Mexico, and Texas are looking at limiting diversions of dedicated revenues from the state transportation fund to uses such as paying the salaries of state highway police officers and helping local school districts buy buses.

Minnesota Gov. Mark Dayton has proposed an $11 billion, 10-year transportation package that would be financed with a 6.5% increase in the state's gross receipt tax on gasoline. The move would add 16 cents to the current levy of 28.5 cents.

The Washington Senate earlier this week adopted a 16-year transportation package that included an increase in the state fuel tax of 11.7 cents per gallon over three years. The fuel tax is currently 37.6 cents per gallon for both diesel and gasoline.

South Carolina Gov. Nikki Haley has proposed a 10 cent increase in the state's 16.75 cent-per-gallon tax on gasoline and diesel, but only if lawmakers cut the state income tax rate to 5% from the current 7%. The House infrastructure committee has countered with a 6 cent per gallon reduction offset with a new 6% sales tax on motor fuel with a ceiling of 26.75 cents per gallon.

A proposal in the Hawaii Legislature would replace the state's 17 cent per gallon gasoline tax with a sales tax totaling either 17 cents per gallon or a still-unspecified percentage of the wholesale price, whichever is greater.

In Idaho, the House Transportation Committee has endorsed a proposal to increase the state's 26 cent per gallon fuel tax by 8 cents on gasoline and 12 cents on diesel. Each tax would go up annually by 1 cent.

South Dakota lawmakers are considering a state Senate proposal for a 2 cent increase in the state's fuel tax of 24 cents per gallon each year for eight years.

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