Yesterday Massachusetts voters repealed a 2013 law that indexed the commonwealth’s gas tax to inflation each year. At a time when gas tax revenues have been falling fast and policymakers are looking for ways to pay for sorely needed transportation infrastructure projects, can we look to New England as a bellwether for how gas tax debates might play out across the rest of the country?
Compare Massachusetts and New Hampshire, each of which enacted gas tax increases in the past two years.
In Massachusetts, the legislature overcame the governor’s veto to pass a gas tax increase in 2013 and index future increases to inflation on an annual basis. Supporters argued that inflation indexing is necessary to keep up with transportation infrastructure projects, which the gas tax historically has been levied to support. But those against the bill argued that inflation indexing was tantamount to “taxation without representation” because the legislature didn’t have to vote on the increase each year. The measure was so unpopular that it spawned a successful initiative to repeal it.
Meanwhile, northern neighbor New Hampshire passed a flat gas tax increase this spring that has generated some driver grumbles but not, so far, a voter-led repeal effort. In a May interview with Bloomberg BNA, the gas tax bill’s sponsor, State Sen. Jim Rausch (R) said he wanted to index his state’s gas tax to inflation, but that probably would have killed the bill. He said he decided that capturing additional gas tax revenue by making it a one-time increase was better than letting the measure die.
States have varying gas tax rate structures, which can be boiled down to one of two general forms: a fixed-rate tax or a variable-rate tax. Flat-rate gas taxes, like those in now Massachusetts and New Hampshire, collect a certain number of cents per gallon of gas purchased. Meanwhile, variable-rate taxes are calculated one of several ways—based on the price of gas (similar to a traditional sales tax), based on a broader measure of the economy’s inflation, or based on a hybrid of both the price of gas and an inflation measure, according to a May 2014 policy brief from the Institute on Taxation and Economic Policy (ITEP).
Right now, the federal government and roughly two-thirds of the states have flat gas tax structures. The federal government has not increased the federal gas tax since 1993, and this paired with more fuel-efficient vehicle use is part of why the federal Highway Trust Fund, which disperses transportation infrastructure project funds, has had brushes with insolvency in recent months.
So will states interested in increasing their gas taxes to pay for transportation projects aim for flat-rate taxes, knowing that the revenue will lose buying power each year that it is not inflation adjusted, because they worry that voters won’t tolerate inflation-adjusted taxes? At least two states (Florida and Maryland) use inflation as at least some part of their gas tax calculations, so measures like these can survive in some states.
Alternatively, will states go for measures that give transportation infrastructure funds a chance at some kind of parity with project costs through some kind of variable-rate structure, and potentially pay a political price?
Or will states just get out of the gas tax game, like Oregon’s new program that taxes people based on the miles they drive on state roads?
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is indexing a tax to inflation “taxation without representation?”
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