Transportation funding in the United States is in trouble. With the Highway Trust Fund set to go broke by late August, Congress has forgone any increase in the grossly inadequate federal gas tax (unchanged at 18.4 cents per gallon since 1993) in favor of plugging recurring funding gaps with general revenues. Currently, Senators Chris Murphy (D-Connecticut) and Bob Corker (R-Tennessee) are floating a proposal to hike the federal tax by 12 cents, but the new revenues would be offset by new tax cuts and its chances of passage are at any rate tenuous before a full legislature that habitually shies away from increasing taxes.
Fortunately, states need not wait for Congress to take action. With an eye toward long-term sustainability, several states will increase their own fuel taxes on Tuesday, July 1.
According to an analysis by the Institute on Taxation and Economic Policy (ITEP), four states will hike their gasoline or diesel taxes next week. The changes generally take two forms – automatic inflationary increases designed to keep pace with the rising cost of building and maintaining transportation infrastructure and hikes resulting from recent legislation.
Four states will see gasoline tax increases on Tuesday. Increases in Maryland and Kentucky are the result of 2013 legislation requiring an annual adjustment to reflect growth in the Consumer Price Index and a quarterly adjustment reflecting an increase in wholesale gas prices, respectively. New Hampshire deserves special kudos after the state legislature passed its first gas tax increase – and the largest of any state this year – since 1991. An additional levy of 4.2 cents per gallon – a decade’s worth of inflationary value – will be added at the pump on Tuesday to support needed transportation projects. Unfortunately, the tax is essentially a fixed rate increase rather than a variable-rate design which could have kept pace with annual increases in infrastructure costs, and it will be repealed in roughly 20 years when bonds for the I-93 project are paid off. Vermont will see a second structural tweak in its tax formula as a result of 2013 legislation overhauling the state’s gasoline and diesel taxes. The imposition of a higher motor fuel percent assessment combined with a decrease in the per gallon tax will result in an overall net increase next Tuesday of 0.6 cents per gallon.
On the diesel tax front, four states will see hikes next week ranging from 0.4 to 4.2 cents per gallon. Changes in Maryland and Kentucky again reflect annual or quarterly price growth. New Hampshire’s diesel tax increase matches that for gasoline (4.2 cents per gallon). Vermont will raise its diesel tax by an additional 1 cent on top of last year’s 2 cent hike as the state’s 2013 tax structure overhaul is fully phased in.
Two more states should have made the list this year, but officials there have actually blocked scheduled fuel tax increases. Georgia Governor Nathan Deal suspended an automatic 15% increase in his state’s variable-rate gas tax by way of executive order earlier this month, citing concerns over the cost burden for families and businesses. North Carolina lawmakers passed legislation during the 2013 session freezing the state’s variable-rate gas tax at 37.5 cents per gallon, effective through June 30, 2015. Officials in these states will likely take credit for enacting “tax cuts” this year as infrastructure projects go underfunded.
Two other states will see their fuel taxes decrease on Tuesday. California will cut its gasoline excise tax from 39.5 to 36 cents per gallon, reflecting a decrease in gas prices. Connecticut’s diesel tax rate is revised each July 1 to reflect changes in the average wholesale price over the past year, and will see a decrease this year of 0.4 cents per gallon.
Fortunately, gasoline tax reform is already on the horizon in Rhode Island, where lawmakers agreed as part of this year’s budget plan to index the tax to inflation, which will mean a roughly 1 cent increase effective July 1, 2015. Michigan’s legislature was expected to come to an agreement this session on a fuel tax increase after voters there expressed a willingness to pay for repairs on badly deteriorating roads and bridges, but proposals to increase the tax by 25 cents per gallon over four years or to index it to keep pace with construction costs stalled. With lawmakers promising to take up the issue again in the fall, another summer construction season is now lost in the state.
Including the budget agreement passed by Rhode Island earlier this month, the total number of states with variable-rate fuel taxes designed to rise alongside the price of gas, overall inflation, or both increases to 19 (plus DC). In the past year, Massachusetts, Pennsylvania, and DC have all switched from fixed-rate fuel tax structures to variable-rate structures.
Given the level of debate and the major changes in states’ fuel tax structures that have taken place in 2013 and 2014, it seems that more states are recognizing the need for a sustainable fuel tax capable of keeping pace with the inevitable increases in transportation infrastructure costs.
NOTE: Differences among states in the direction and magnitude of gas price changes evident in rate revisions reflect states’ use of state-specific price data as the basis for rate changes. In particular, California experienced the largest gasoline price drop of any state over the past year and will, therefore, see a large negative change in their rate.