Extras on Excise: After a Volatile 2013, State Lawmakers Remain at Odds on Gas Tax Policies


Editor's Note: This blog post is the first in a series by Bloomberg BNA's Christopher Young on 2014 state gas tax reform and similar developments.

From potholes to cement cracks, visual evidence of the crumbling of our nation’s transportation infrastructure is all around us. Indeed, over the past few decades, it’s been well-documented and publicized that our roads, bridges and tunnels are in a perpetual state of decay.  What’s more, as states continue to postpone addressing such erosion, not only will roadways become more vulnerable and dangerous, but the gap between a realistic solution and an impractical or controversial one will continue to widen.

But like many problems, throwing money at this one may actually make it go away. In most states, an imbalance between rising road maintenance costs and available revenue has led to such deterioration.   As states scramble for solutions for their insufficient highway funds, many have identified the gas tax as a resource for fixing such shortfalls.

Typically, state gas taxes are either fixed at a flat rate or tied to a variable figure such as gas prices or inflation and subject to adjustment on a routine basis—usually annually or biannually. But like the federal gas tax, which has been stuck at $0.184 per gallon for 20 years, many state gas taxes have likewise remained stagnant over that period of time. Accordingly, the gas tax has recently been a popular area for reform.

Indeed, after an exceptionally active 2013, the first month of 2014 has demonstrated that a national trend toward a gas tax increase as a means to inject much needed revenue into state highway or transportation funds is currently under way and may be gaining momentum. 

Thus far in 2014, Iowa and New Mexico have already introduced legislation to increase their respective gas taxes and similar legislation is currently being drafted in New Hampshire while Minnesota and Utah are expected to follow suit.  Further, on Jan. 29, Delaware Gov. Jack Markell (D) proposed raising the state's motor fuel tax by $0.10 and indexing it to inflation.

However, not all states are on board with a tax hike. In her State of the State address on Jan. 22, South Carolina Gov. Nikki Haley (R) received a round of applause when she emphatically stated her intention to veto any bill that raises taxes on gasoline.  Similarly, at a Jan. 6 luncheon, Mississippi Lt. Gov. Tate Reeves (R) declared that an increased gas tax would be a “nonstarter” in the state Senate. In addition, H.B. 22 has been introduced in Kentucky to eliminate automatic rate adjustments by placing such authority in the hands of the General Assembly. However, Kentucky Gov. Steve Beshear’s (D) two-year budget proposal includes a reversal of the state’s $0.015 gas tax decrease that took effect Jan. 1 as a result of such adjustment.

But while a gas tax increase may seem logical and may provide short-term relief, there is concern that simply increasing the tax may be inadequate as a long-term solution. As studies have established, budget shortfalls stem from outdated gas taxes that are insufficient or incapable of covering or keeping up with the operating costs of maintaining state highways.

Instead, states would be better suited to link their gas tax rate to a variable figure, thus providing a sustainable stream of revenue by requiring routine adjustment, according to Carl Davis, senior policy analyst at the Institute on Taxation and Economic Policy. Ideally, “if the point of the gas tax is to pay specifically for transportation construction and maintenance, states are better off using a construction-specific inflation measure,” Davis said.

While states have thus far been reluctant to tie their gas tax rates to transportation infrastructure costs, the trend toward variable figure reform has certainly been established. Indeed, according to Davis, there are currently 18 states plus the District of Columbia that link their gas tax to some variable figure, with the most common being the price of gasoline in their respective state

But linking to gas prices can be problematic because “gas prices are significantly more volatile than the general inflation rate,” Davis said.  For example, while inflation may increase a couple of percentage points per year, the price of gas can swing up or down by $0.20 in a single week, Davis said. 

Florida, Massachusetts, and Maryland, on the other hand, link to inflation and Delaware's and New Hampshire's proposals call for the same. While not the best option, linking to inflation is a “very good second best option,” Davis said, because “over the long term, the rate of inflation in construction costs isn’t all that different from the rate of inflation in the rest of the economy.” But, “by far the worst option out there” is the flat-rate we see at the federal level and in 32 states and any reform that moves away from this is “a lot better than sticking with the flat-rate gas tax that’s guaranteed to fall short in the years ahead,” Davis said.

As 2014 proceeds, states will likely continue to debate the notion of reforming their gas taxes. However, it’s an election year for many of these states and that traditionally means a general unwillingness to propose or vote in favor of any sort of perceived or actual tax hike. Accordingly, all this early activity may lead nowhere. But then again, because sustainability is a constant problem for too many states’ transportation budgets, it may also be an indicator of eventful year.

Continue the discussion on the BBNA State Tax Group on LinkedIn: Is state gas tax reform a practical solution to transportation budget shortfalls? Will this trend have longevity in 2014? 

The following chart provides a non-exclusive look at state gas tax developments from 2013 through January 2014.

     STATE                                             YEAR                                             DEVELOPMENT  

California

2013

California Board of Equalization voted 3-2 to raise the excise tax rate for gasoline from $0.36 to $0.395 per gallon in 2013.

Connecticut

2013-14

On Jan. 30, Gov. Dannel Malloy (D) announced a plan under which the state’s $505 million projected surplus will fund refund checks for sales and gas tax for taxpayers meeting certain income requirements. In addition, a 2005-scheduled increase to the state’s gross receipts tax on gasoline raised the gas tax by $0.043 in 2013.

Delaware

2014

On Jan. 29, Gov. Jack Markell (D) proposed raising the motor fuel tax by $0.10 per gallon and indexing it to inflation.

District of Columbia

2013

2013 legislation implemented a gasoline tax equal to 8 percent of the average wholesale price per gallon, subject to adjustment twice a year.

Iowa

2014

On Jan. 29, House Study Bill 514 unanimously passed the House Transportation Committee. The bill would raise the state’s gas tax by $0.10 per gallon over three years. 

Kentucky

2014

H.B. 22 has been introduced to grant the General Assembly sole authority to adjust the state’s “average wholesale price” of gasoline. Further, Kentucky Gov. Steve Beshear’s (D) two-year budget proposal includes a reversal of the state’s $0.015 gas tax decrease that took effect Jan. 1 as a result of such adjustment

Maryland

2013

2013 legislation replaced flat general excise tax rate with a rate indexed to inflation. New law further imposed 1 percent sales and use tax equivalent rate on motor fuel, with potential increase to 5 percent by fiscal 2017.

Massachusetts

2013

2013 legislation linked the gas tax rate to inflation. Rate increased from $0.21 to $0.24 per gallon.

Minnesota

2013-14

In 2013, the state Senate approved a $0.05 gas tax increase that never came to a vote in the House. Similar legislation is expected to be introduced in 2014.

Mississippi

2014

On Jan. 6, Lt. Gov. Tate Reeves (R) stated that an increased gas tax would be a “nonstarter” in the state Senate.

New Hampshire

2014

Legislation currently being drafted by Sen. Jim Raush (R) to increase the gas tax rate and to link it to inflation.

New Mexico

2014

H.B. 74 introduced to raise gasoline and diesel fuel tax rate from $0.17 to $0.22 per gallon through June 30, 2024, and then revert back to $0.17.

North Carolina

2013

2013 legislation implemented a $0.375 per gallon cap on the gas tax through June 30, 2015.

Oregon

2013

2013 legislation established the nation’s first vehicle miles tax as an alternative method of generating fuel tax from specific vehicles. Beginning July 1, 2015, the Oregon Department of Transportation is authorized to set up a mileage collection system for 5,000 volunteer drivers in which they may charge $0.015 per mile driven and issue a gas tax refund to those participants.

Pennsylvania

2013

Effective Jan. 1, legislation eliminated flat rate gas tax and increased oil company franchise tax’s $1.25 cap on average wholesale price of gasoline and diesel to $1.87. The amount will be raised to $2.49 a year later and eliminated in 2017, when a $2.99 price floor will be established. As a result, tax on gasoline increased from $0.312 to $0.407 and from $0.381 to $0.510 on diesel fuel.

South Carolina

2014

In her Jan. 22 State of the State address, Gov. Nikki Haley (R) stated that raising the gas tax “is not an option . . . [and she] will veto any bill that reaches [her] desk that raises taxes on gasoline.”

Utah

2014

Gas tax reform among those issues likely to be debated in upcoming 2014 Legislative Session according to multiple reports.

Vermont

2013

2013 legislation imposed new 2 percent assessment fee based on tax-adjusted retail price of gasoline. New law raised gas tax rate by $0.059 per gallon.

Virginia

2013

2013 legislation eliminated fixed tax rate and introduced tax based on gas prices. Under new law, gas rate is subject to adjustment twice a year and is equal to 3.5 percent average wholesale price of gasoline and 6 percent wholesale price of diesel fuel.

Washington

2013-14

2013 legislation provided funding to Washington State Transportation Commission to examine feasibility of transitioning from the current motor vehicle tax to a road usage charge. Increased gas tax is likely to be debated in upcoming 2014 legislative session.

Wyoming

2013

2013 legislation increased gas tax rate by $0.10 from $0.13 to $0.23 per gallon.

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