More States Increasing Fuel Taxes to Make Overdue Highway Repairs
This story appears in the March 23 print edition of Transport Topics.
A flurry of activity in statehouses to generate additional revenue for highway funding continued last week, as one governor signed legislation to increase fuel taxes and a second said he plans to sign a similar bill.
In South Dakota, Gov. Dennis Daugaard (R) signed a bill March 17 increasing fuel taxes 6 cents a gallon in April.
Likewise, Utah Gov. Gary Herbert (R) announced his intention to sign a bill, approved by the Legislature on March 12, to replace his state’s per-gallon tax with a wholesale levy collected at the pump, starting next year.
“In just a little over two years, we’ve seen 10 states enact these gas-tax changes,” said Carl Davis, senior policy analyst at the Institute on Taxation and Economic Policy, a Washington think tank. “Utah’s about to become the 11th.”
Davis, who tracks fuel taxes, said states are reacting in part to Congress’ failure to address the transportation funding issue.
Last month, Iowa Gov. Terry Branstad (R) signed a bill that already has upped the state’s fuel tax 10 cents a gallon. Lawmakers in Georgia, Idaho, Washington and South Carolina are trying to hammer out transportation funding plans that rest on fuel taxes.
In Michigan, meanwhile, lawmakers put a funding measure on the May 5 ballot to replace the per-gallon fuel tax with a wholesale fuel tax.
Joseph Henchman, vice president of legal and state projects at the Tax Foundation, another Washington think tank, pointed out that there always have been state and federal revenue streams for transportation.
“In the grand scheme of things, while we’re spending hundreds of billions of dollars a year on transportation, only about $40 [billion] or $50 billion of that comes from the federal budget,” Henchman said. “So states also need revenue sources to be able to not only cover their share of interstate costs but also state and local road networks.”
Henchman and others said recent state actions did not happen overnight, even though state officials knew infrastructure was deteriorating.
“They’ve been working on it for years, and finally the need got so strong that they made the decision to do it,” Myron Rau, president of the South Dakota Trucking Association, said of the tax increase there.
Daugaard’s support was the key to getting the fuel tax raised to 30 cents a gallon from 24 cents, Rau said.
It’s been more than a quarter century since Iowa hiked its fuel tax in 1989, Davis said.
Iowa waited so long to add 10 cents to its 23.5-cents diesel and 22-cents gasoline taxes that the levies were at their lowest rate in history relative to inflation, he said.
“It’s not that Iowa’s gas tax is at an all-time high now,” Davis added. “It’s exactly the opposite. There’s a big hole to be dug out of.”
Utah’s plan to replace its 24.5-cents-per-gallon tax with a 12% wholesale fuel tax next year has a ceiling to protect consumers against rising fuel prices and a floor to protect the state against falling fuel prices that depress tax revenues.
Linda Hull, policy and legislative director for the Utah Department of Transportation, said the bill lawmakers approved sets the statutory floor at a per-gallon wholesale price that will add about 5 cents more next year than what the current 24.5-cents-per-gallon tax adds to a retail gallon of fuel.
At the same time, a ceiling on the wholesale tax won’t let more than 40 cents in taxes be passed through to the retail price.
Michigan has a fairness clause written into its complex May 5 ballot proposal on taxes.
Voters are being asked to abandon the 19-cents-a-gallon gasoline tax and 15-cents diesel tax for a 14.9% wholesale fuel tax that could add 8 or 9 cents a gallon to the current fuel taxes consumers pay.
The plan also would raise the state sales tax from 6% to 7%, but consumers would no longer pay the sales tax on fuel purchases. And to offset the higher sales tax and the impact of the wholesale tax, low-income families would get a new tax break.
In other states, fierce battles are playing out.
For months, Kentucky Gov. Steve Beshear (D) has been trying to persuade lawmakers to put a floor on the state’s wholesale fuel tax. Low fuel prices are eroding revenues by tens of millions of dollars a month, but some lawmakers said a floor equals a tax increase.
South Carolina Gov. Nikki Haley (R) and lawmakers are sparring over how to fix roads with a fuel tax that’s been 16.75 cents a gallon since 1987.
“We’ve been incrementally starving ourselves and the system is showing it,” said Rick Todd, president of the South Carolina Trucking Association. He added that the organization would support higher fuel taxes.
But Haley is proposing a 10-cents increase to the fuel tax in exchange for income tax cuts that would reduce revenue by more than higher fuel taxes would produce for roads, setting up a budget fight truckers don’t want, Todd said.
