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Cheap gas, crumbling infrastructure spark fuel-tax talk

Author: Elaine S. Povich

Source: The State

December 15, 2014

While consumers rejoice at lower gasoline prices, states with fuel taxes that increase or decrease with the wholesale price of gasoline or the inflation rate are struggling to deal with declining revenues.

Even in states with a per-gallon tax, fuel-efficient cars and reduced driving have combined to lower revenues from gas taxes, which often are dedicated to road maintenance and construction. With infrastructure crumbling across the country, even some tax-averse Republicans are considering raising gas taxes. Cheap gasoline makes such levies more politically palatable, since consumers are less likely to notice the extra burden when they are filling up.

Florida, Maryland and New Hampshire allow gas taxes at the pump to rise or fall with inflation based on the Consumer Price Index. Massachusetts was set to do so this year, but voters last month scrapped that idea. Maine used to adjust for inflation, but that was repealed in 2012. Kentucky, North Carolina, Virginia, West Virginia and the District of Columbia adjust for inflation on the wholesale price of gasoline.

Most states have a separate gasoline tax, so they don’t apply regular sales taxes to gasoline. But Hawaii, Illinois, Indiana, and Michigan collect some or all of their gasoline tax revenue with a sales tax on purchases. California applies a partial sales tax on gasoline on the wholesale price and most counties in the state also impose a separate transportation sales tax. In New York, the state collects local sales taxes on gasoline.

Most states and the federal government tax gas by the gallon. But even under that system, inflation erodes the value of the revenue. For example, the federal motor fuels tax, 18.4 cents per gallon, generates one-third fewer dollars in real purchasing terms than when it was last increased in 1993, according to an estimate by the Tax Foundation, a nonpartisan research organization.

“At the state and local levels, gas taxes cover less than half of state and local transportation spending,” said Tax Foundation economist Joseph Henchman. He said proposals to cut mass transit funding or relax federal salary standards for laborers on public works projects won’t solve the underlying problem, which is that “every year we’re spending a little more and taking in a little less.”

Indexing the tax to inflation was supposed to help ease that problem. And it did, almost every year of the past 20, as gas prices rose. But this year, gasoline prices have dropped precipitously. With that decline, revenues also have gone down in the states where the tax is indexed.

Nowhere is that more apparent than in Kentucky, where fuel tax revenues have declined in four of the last five quarters, said Chuck Wolfe, public affairs director for the state’s Transportation Cabinet.

The biggest single decline was in the first quarter of this year, when the excise tax dropped 1.5 cents per gallon, Wolfe said. But in the quarter that begins New Year’s Day it will go down 4.3 cents a gallon.

In December, 2013, the excise tax portion of the levy was 25.9 cents a gallon, plus a “supplemental” tax of a nickel a gallon for gasoline and 2 cents a gallon for diesel. With the latest drop in the price of gas, the variable excise tax will go to 21.2 cents a gallon in January.

With the nickel-a-gallon supplemental tax and an “underground petroleum tank fee” of 1.4 cents a gallon, the total state tax paid by motorists for gasoline will be 27.6 cents a gallon in January, down from the current total of 31.9 cents a gallon.

Last year, Gov. Steve Beshear, a Democrat, proposed that the legislature restore some of that year’s drop in the tax and set a floor, below which the tax could not fall. The Democratic-controlled House approved the bill, but the Republican-led Senate did not.

Despite the current problems, Wolfe said Kentucky transportation officials have considered themselves fortunate to have a motor fuel tax that is indexed. “We’re envied by other states for having that,” he said. “But when you do have an indexed tax, you do have this other side of the coin, which is something that will have to be dealt with.”

According to David Brunori of Tax Analysts, a nonprofit provider of tax news and analysis, inflation-adjusted gas taxes are viewed as an alternative to the “politically messy” idea of raising taxes. “But they result in rates going up without political accountability,” Brunori said. “That is not good; indeed, it is bad government. We should expect leaders to make the case for higher taxes when necessary.”

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