ASCE Magazine, June 2013
Policy Briefing, Jay Landers
IN THE FIRST four months of this year, four states—Wyoming, Virginia, Maryland, and Vermont—enacted legislation to increase their excise or sales taxes on fuel in an effort to boost revenues for transportation needs. While several other states are considering similar options, it remains to be seen whether the actions of the four states indicate a new-found willingness on the part of lawmakers to raise taxes related to transportation. However, the challenges prompting states to reexamine how they pay for their transportation needs are not likely to go away soon, raising the prospect of more states following suit.
In addition to confronting difficult economic conditions in recent years, many states have faced a “series of challenges” regarding transportation funding, including chronic gaps between investment needs and outlays, growing demand for transportation services, and declining revenues from gas taxes as motorists switch to vehicles offering greater fuel efficiency, says Aaron Castelo, ASCE’s director of state and local government relations. Taken together, these factors “put states in a real bind” in terms of paying for their transportation needs, Castelo says.
Another issue that states have had to contend with involves uncertainty regarding federal funding levels for transportation, Castelo says. After the authorization for the federal surface transportation program expired at the end of fiscal year (FY) 2009, Congress extended the program 10 times before formally reauthorizing it in mid-2012 with the passage of the legislation entitled Moving Ahead for Progress in the 21st Century (MAP-21). The stopgap nature of federal funding during that period complicated efforts by the states to conduct long-range planning. Although MAP-21 provides stable funding levels through FY 2014, after that any certainty for states begins to fade. If recent history is a guide, Congress cannot be counted on to reauthorize and adequately fund the surface transportation program in a timely fashion.
The potential for delay assumes added significance in light of a recent analysis of the federal Highway Trust Fund (HTF) by the Congressional Budget Office. In a written statement provided to the House Committee on the Budget as part of a hearing held on April 24, the Congressional Budget Office estimates that the HTF will end FY 2014 with a balance of $7 billion, but only because of $12 billion in congressionally mandated transfers to the HTF, mostly from the federal government’s general fund. In the absence of any further congressional action, the HTF “will have insufficient revenues in [FY] 2015 to meet all obligations,” according to the written statement. In FY 2015 “lawmakers would need to transfer another $14 billion to the Highway Trust Fund if they chose to continue funding surface transportation programs as they have in recent years,” the statement said. Other options for keeping the HTF in the black include the politically unpopular steps of cutting transportation spending, raising federal gas taxes to increase revenues to the HTF, or a combination of the two.
Against this backdrop states are seeking to augment the transportation funding they receive from the federal government, says Joung Lee, the associate director for finance and business development for the American Association of State Highway and Transportation Officials, of Washing-ton, D.C. “The federal program has some stability right now in terms of being able to fund at the MAP-21 levels through the end of the next fiscal year,” Lee says. “But after that, there is a lot of uncertainty about how to keep that program going.” Therefore, states are focusing on ways to “go above and beyond what they can expect to receive from the federal government,” he says.
In mid-February Wyoming became the first state to increase its gas tax this year when Governor Matt Mead (R) signed legislation raising the state’s taxes on gasoline and diesel fuels by 10 cents per gallon. The law, which takes effect July 1, also increases taxes on snowmobiles, off-road vehicles, and motorboats. All told, the changes are expected to generate nearly $72 million in additional revenue for the Wyoming Department of Transportation in FY 2014, almost all of which will fund highways, city streets, and county roads.
While Wyoming’s gas taxes have long been among the lowest in the nation, the state has had to supplement its revenues from gas taxes with contributions from its general fund to meet transportation needs. In raising gas taxes, state lawmakers wanted to reduce the extent to which Wyoming has to continue this practice, Lee says. However, another factor also influenced their decision. Even though Wyoming’s gas taxes were significantly lower than in neighboring states, the “retail price of fuel in Wyoming was still the same as in the surrounding states,” he notes. The lawmakers concluded that the difference was “actually going to the oil companies, rather than being realized for infrastructure investment,” Lee says.
In late March Virginia overhauled its approach to transportation funding, scrapping its existing gas tax of 17.5 cents per gallon in favor of a 3.5 percent wholesale tax on gasoline and a 6 percent wholesale tax on diesel fuel. Along with raising the state’s sales tax from 4 percent to 4.3 percent, lawmakers dedicated a portion of all sales tax revenue to transportation. Additional tax increases were levied in northern Virginia and in the Hampton Roads area to pay for local transportation improvements. Among other changes, the lawmakers raised sales taxes on motor vehicles and imposed an annual license tax on electric, hybrid, and alternative-fuel vehicles. Scheduled to take effect on July 1, the new funding mechanisms are expected to raise more than $5.9 billion for transportation over the next five years, according to a March 26 news release issued by the office of Virginia’s governor, Bob McDonnell (R).
In late March Maryland too enacted legislation revamping its approach to funding transportation infrastructure, implementing a series of measures that are expected to generate $4.4 billion over the next six years, according to the Maryland Department of Transportation. Among the changes, the state’s current gasoline tax of 23.5 cents per gallon was indexed for inflation, although increases may not exceed 8 percent annually. The change is the first to Maryland’s gas tax since 1992. A 3 percent sales tax on gasoline is to be phased in over the next three years, while the mass transit fares charged by the Maryland Transit Administration also will be indexed for inflation.
In Wyoming, Virginia, and Mary-land, leadership by the governors proved crucial in increasing transportation funding. “The governors in each of those states led the effort,” Castelo says. Although the political climates were different in the three states, in each case the governor made a strong case for increasing revenues dedicated to transportation, Caste-lo notes. Even in conservative Wyoming, he says, Republican lawmakers and many business groups rallied behind the governor’s call to increase the gas tax. In Maryland “geographic competition” on the part of its neighbor Virginia also may have played a role in prompting that state to revise its approach to transportation funding, Castelo says. The American Association of State Highway and Transportation Officials’ Lee agrees, noting that Virginia’s legislative actions appeared to be a “catalyzing event” for Maryland lawmakers.
In late April, meanwhile, Vermont became the fourth state to change its tax policy pertaining to motor fuels and boost its transportation funding levels. In legislation that took effect May 1, the state added a 2 percent sales tax on gas while reducing the per-gallon tax on gas by 0.8 cent. However, Vermont’s tax on diesel fuel will increase by 3 cents per gallon over the next two years. The changes are expected to generate more than $25 million in new transportation funding annually.
At press time, several other states were considering efforts to boost transportation funding. Among them, New Hampshire and Missouri appeared to be the closest to raising their gas taxes, Lee says. — JAY LANDERS