Plummeting Fuel Prices Spark New Debate on How States Can Protect Tax Revenues

This story appears in the Oct. 27 print edition of Transport Topics.

While lower gasoline and diesel prices are providing U.S. commuters and truckers money to spend elsewhere, state officials said it is forcing them to cope with lower revenues.

It also presents problems for states that are considering replacing or augmenting per-gallon fuel levies with sales taxes.

The lower revenues “will hardly come as a shock to anyone who’s bought gas lately,” Kentucky Transportation Department spokesman Chuck Wolfe said.

Last week, the average retail price of gasoline was the lowest in almost four years and diesel prices the lowest in more than two years, the U.S. Department of Energy reported.

However, that means fuel-tax revenues are down in Kentucky, Wolfe said, leaving state officials wrestling with the idea of scaling back road spending.

Likewise in Vermont, where gasoline prices have fallen 60 cents since April, transportation officials recently revised their revenue estimate down $500,000 for the year.

Arturo Perez, director of the fiscal program at the National Conference of State Legislatures, said states have seen low fuel prices before.

“The last time this happened was when we were getting hit by the global recession, and at this point, that’s one significant difference,” he said.

Perez also said the hit to state revenues depends on how long the low fuel prices last.

At the state and national levels, the notion of replacing per-gallon fuel taxes with sales taxes — something Virginia did last year on gasoline — is gaining cache.

Two governors, Scott Walker (R) of Wisconsin and Mark Dayton (D) of Minnesota, have said they’re considering sales taxes. U.S. Sen. Barbara Boxer (D-Calif.), chairwoman of the Environment and Public Works Committee, where highway bills originate, has said the same.

As it is, fuel taxes in such states as Ohio, North Dakota and Alabama are still simple per-gallon levies on diesel and gasoline, just like those at the federal level.

Their revenue is unaffected by fuel prices but vulnerable to changes in consumption.

Many states, though, have cobbled together complicated systems.

Kentucky, for instance, has a per-gallon diesel tax of 29.5 cents and a gasoline tax of 32.5 cents, as well as a 5.4-cent wholesale sales tax on gasoline and a 12.7-cent tax on diesel that are passed on to consumers at the pump.

That wholesale sales tax part of the state’s fuel levy is what could cost Kentucky millions of dollars this year, state officials said.

Falling fuel prices dramatize the “conundrum” for states that desperately are seeking transportation funding, said Chris Cole, director of policy, planning and intermodal development for the Vermont Department of Transportation.

Vehicles are more fuel-efficient and to address environmental and congestion problems, states promote and subsidize such things as car pools and public transit, Cole said.

“So our vehicle miles traveled are declining, and our fuel consumption is declining and, therefore, our revenues are declining, and we see those trends continuing,” he said.

Gasoline sales in Vermont are down 42 million gallons annually compared with 2005, he said. In 2012, policymakers tried to fix the resulting revenue problem with a new tax system.

“What we tried to do when we redid our gas tax in 2012 was

to have 50% of our gas-tax revenue come in from the traditional excise tax, pennies on the gallon, and to have 50% of our gas tax come in based on price,” he said.

The state levied what it calls “assessments” on fuel at the distributer level, but now with falling fuel prices that strategy isn’t generating the hoped-for revenue, Cole said.

Emile Frankel, visiting scholar at the Bipartisan Policy Center in Washington, D.C., said: “I have the perfect answer for it: a mileage-based fee or tolls, something based on use of the facilities and not on fuel.”

Vermont’s Cole echoed Frankel’s comments.

“It’s really paramount for states and the federal government to identify another funding source besides taxing fossil fuels,” Cole said.

However, backers of per-gallon fuel taxes, such as American Trucking Associations and the Chamber of Commerce, argue that higher fuel taxes are a much simpler collection method that’s already in place.

Frankel said he agrees that per-gallon taxes are simpler.

One way states with sales-tax levies can protect themselves against price changes, Frankel and others said, is to put a “floor” on the sales tax, meaning when pump prices drop below a certain level, the tax does not drop with them.

Virginia did that with its gasoline sales tax, although, officials said this summer that they already had reached the floor and are not reaping hoped-for revenue.