Shrinking Take From Percentage Taxes on Fuel Threaten Some State Budgets

AASHTO Journal, 16 January 2015

Kentucky’s transportation budget took a big hit Jan. 1, as its percentage-based sales tax on motor fuels dropped in line with plunging oil prices. Now, though, the Kentucky Transportation Cabinet is forecasting another tough hit in its revenue stream as of April 1.

Transportation Secretary Mike Hancock told the Louisville Courier-Journal the state’s gasoline tax is poised to shrink to 22.5 cents a gallon April 1, down from 27.6 cents on Jan.1 and 31.9 cents in the 2014 fourth quarter.

Unless the state legislature changes the law that determines the fuel tax level, Hancock said the January and April reductions in the tax rate will take a combined $250 million out of Kentucky’s transportation budget. That includes a $56 million revenue hit for the fiscal year ending June 30, and another $194 million for the full budget year that begins July 1.

A growing number of states have some type of vulnerability to the recent plunge in motor fuel prices.

Alaska, North Dakota, Texas and several other large oil producing states generate a sizable portion of state revenues through oil taxes or fees. And several states besides Kentucky have either added wholesale percentage gas taxes to their fixed, per-gallon tax rates or replaced their fixed taxes with upstream wholesale levies.

That strategy is aimed at capturing a sort of protection against inflation, since oil prices tend to rise over time with economic growth. Some states, though, use a direct cost of living index to adjust variable fuel taxes, and others that use wholesale fuel tax structures vary their price floors and caps to guard against unusual volatility.

North Carolina is another state, like Kentucky, where the wholesale portion of its gas tax has a built-in cap on the higher limit but no effective floor price for when the cost of oil and highway motor fuels may drop sharply.

Although North Carolina’s fuel tax increased slightly Jan. 1, the state DOT estimates based on current price trends that it could stand to lose $300 million or 10 percent of its revenue stream in the fiscal year starting July 1. Transportation Secretary Anthony Tata told AASHTO Journal, “We’re talking to the legislature about a lot of things with regard to transportation funding.”

Minnesota Gov. Mark Dayton said he will offer a transportation funding proposal that includes adding a percentage sales tax, and some state senators have introduced one as well.

Transportation Commissioner Charles Zelle told a Transportation Research Board audience Jan. 13 he likes adding such taxes to diversify the revenue stream for project funding. He told AASHTO Journal the details of the coming Dayton proposal would be important, such as how it might determine the actual tax level amid volatile prices.

Back in Kentucky, the Courier-Journal reports there have been differing ideas put before the legislature on resetting the tax’s floor price level to avoid at least some of the projected budget shortfalls, but some key lawmakers disagree on the best approach.

In the meantime, the KYTC has already cut the share of highway fund the state sends to cities and counties. And it has warned that without some improvement to the revenue outlook it will have to cut back on infrastructure projects and maintenance it can tackle at the state level.

This entry was posted in General News, Legislative / Political, News. Bookmark the permalink.

Comments are closed.