EXTRAS ON EXCISE: WILL STATE LEGISLATURES PASS GAS TAX HIKES THIS YEAR?

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Many state legislative sessions are in full swing now, and several states are considering increasing their gas tax—despite its traditional unpopularity with constituents.  Whether low fuel prices, a recovering economy or systemic transportation funding shortfalls have spurred action, this year gas tax hike proposals are coming from both sides of the aisle from places like Georgia, Minnesota, New Jersey, South Carolina and South Dakota, among others.

Still, that does not mean every state is on board.  Take Maryland, for instance.

Gov. Larry Hogan (R) was elected in a surprise victory in November, and in his Feb. 4 State of the State address he said that he would propose repealing the automatic gas tax increases that former Gov. Martin O’Malley (D) enacted in 2013, according to Bloomberg BNA’s Weekly State Tax Report.

In 2013, Maryland reformed its gas tax by changing the tax’s structure from a flat rate tax (collecting an unchanging specific number of cents per gallon) to a variable-rate gas tax. In Maryland’s case, this variable rate means the rate changes with gas prices and inflation each year, although other variable-rate gas tax states use other formulas to determine the variable element, such as adjusting the gas tax based only on gas prices.

In his address, Hogan called attention to the fact that under current law, the gas tax can increase each year without it coming up for a vote in the legislature. Maryland’s gas tax increased Jan. 1, to $0.3030, an increase of $0.029 from what motorists paid in the second half of 2014.

“Marylanders deserve the transparency to know how their elected leaders vote every time the state takes a bigger share of their hard-earned dollars,” Hogan said, according to the transcript of his address.  

However, the kind of funding structure that Maryland put in place has been called good policy by organizations like the Institute on Taxation and Economic Policy (ITEP), a non-profit, non-partisan research organization in Washington, D.C., because the inflation adjustment allows the revenue’s buying power to keep up with transportation expenses over time. Flat-rate taxes do not do that when, historically and realistically, legislatures do not vote to increase them each year. So far, the District of Columbia and 18 states levy variable-rate gas taxes.

Still, public perception counts. In November, Massachusetts voters repealed their state’s recently passed gas tax inflation-indexing provision via an initiative. Some opponents of the inflation indexing provision argued that a gas tax indexed to inflation was “taxation without representation.”

Some states, such as Kentucky, Nebraska, New York, Vermont and West Virginia all have provisions in their gas taxes that allow the tax to increase or decrease based on gas prices. These states all decreased their gas taxes effective Jan. 1 based on these provisions and the then-falling price of gas, according to ITEP. Massachusetts’ inflation-indexing provision would not allow the state’s gas tax rate to fall below $0.21 per gallon, keeping motorists from benefiting from the falling prices. 

In light of consistent shortfalls, policymakers may be rethinking their entire transportation funding scheme.  In Connecticut, House Speaker Brendan Sharkey (D) last week said he would like to reduce the gas tax and, at the same time, introduce tolls to Connecticut’s roads. Oregon is trying out a road usage charge this year with a group of volunteer drivers who will receive gas tax rebates in exchange for paying the road usage charge. And California is following in Oregon’s footsteps, passing legislation last year to get the ball rolling on a pilot program that also charges users for miles driven on the road rather than on amount of gasoline consumed.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn:  Should gas taxes be indexed to inflation or other variable measures that would allow the tax rate to fluctuate?

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