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Research & Commentary: Minnesota Should Not Increase Gas Tax Rates

April 18, 2019

In this Research & Commentary, Matthew Glans discusses a proposed increase in Minnesota’s gasoline taxes that would be the largest in the state’s history.

Over the past five years, 26 states have increased their gas tax rates. Even worse, many more are considering similar hikes. In Minnesota, state legislators are considering several proposals that would increase the state’s fuel tax or increase fees on licensing and registration.

In his 2020-2021 budget plan, Minnesota Gov. Tim Walz called for a nearly 70 percent increase in the state’s tax on gasoline and other motor fuels—the largest hike in state history. If enacted, Walz’s plan would increase the motor fuel excise tax from 28.6 cents per gallon to 48.6 cents per gallon. If Walz’s plan is approved, Minnesota’s gas tax rank would move from 25th to fourth highest in the nation.

Under Walz’s proposal, the tax would be increased gradually over two years and indexed thereafter, increasing it automatically each year. Tying any tax rate to a certain commodity price or the Consumer Price Index is problematic and makes politicians and regulators less accountable for tax changes. Even worse, this can contribute to higher prices by placing upward pressure on the very measures used to determine the rate.

Walz’s proposal was stopped in the Minnesota Senate. However, another similar proposal remains in the Minnesota House. The House proposal also phases in a 20-cent-per-gallon sales tax on gasoline, but over four years rather than two. The funds would be used to fund road and bridge repairs.

In addition to the fuel tax increase, the House proposal includes several new “fees,” which are better described as taxes, including a $75 fee for electric vehicles to be used for building out state infrastructure for electric vehicles. This fee appears to be counterintuitive, increasing the number of electric cars on the road by improving the electric infrastructure will only exacerbate the effect electric vehicles have on gas tax revenue. The House proposal would also increase vehicle license tab fees for newer cars and impose a 1/8-cent increase on the motor vehicle sales tax for those living in the seven-county Twin Cities metro area to boost transit funding.

John Phelan, an economist at the Minnesota-based Center of the American Experiment, argues the burden of government in Minnesota is already very high and that an increased gas tax is unnecessary. “Before dipping deep into their pockets once more, Gov. Walz should find out what happened to all the money the government has already had,” Phelan told Budget & Tax News. “The Minnesota state government’s revenues are at near-record highs in real terms and in real per capita terms. On top of this, they have a projected $1 billion budget surplus for the next biennium.” Phelan questions why a tax was needed with such a surplus and recommended a larger examination of the state’s spending.

Any proposal that would increase Minnesota’s gas tax ignores the mounting evidence showing gasoline levies are a regressive form of taxation that shortchanges transportation networks. In recent years, the rise of fuel-efficient cars has decreased motor-fuel tax coffers and disproportionately shifted the transportation tax burden to low-income drivers, a group that typically owns older, less-fuel-efficient vehicles. Owning a car is already expensive in Minnesota. According to a report by U.S. News and World Report, Minnesota is the 14th-most expensive state to own a car. “Compared to its neighbors, it costs $687 more to own a car in Minnesota than in Iowa, $1,311 more than in Wisconsin, $1,797 more than in South Dakota, and $2,889 more than in North Dakota,” the report found. The Center for the American Experiment also found 14 percent of the state’s roads are in poor condition.

In 2015, Daniel Vock, writing for Governing, analyzed state gas tax data reported to the U.S. Census Bureau and found two-thirds of state fuel taxes failed to keep up with inflation, leading to dramatic reductions in fuel-tax-related revenue.

In a Maryland Public Policy Institute study, Wendell Cox and Ronald Utt argue gas taxes have a significantly greater detrimental effect on lower- and middle-income families than they do on the wealthy, and Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional spendable income per month for an average family.

Even worse, a tax hike would raise prices on goods and services throughout the economy, because virtually all consumer goods are transported using gasoline-powered vehicles. In fact, nearly 70 percent of all freight transported annually in the United States, accounting for manufactured and retail goods worth $671 billion, is transported by truck, according to Truckinfo.net. Businesses will simply pass these added costs on to consumers.

As sales of fuel-efficient vehicles expand, motor-fuel tax revenues will decline more rapidly. Minnesota must find new and more effective ways to cover the costs of transportation projects, if the state wishes to avoid a fiscal disaster. For instance, the state could privatize roads, expand toll systems, or, in line with what has occurred in several cities across the country, lawmakers could implement congestion pricing—varying toll prices based on congestion—to manage demand and limit traffic problems.                

The following documents provide additional information about how motor-fuel taxes are applied and their effect on the economy.
 

Dispelling the Myths: Toll and Fuel Tax Collection Costs in the 21st Century
https://reason.org/wp-content/uploads/2012/11/dispelling_toll_and_gas_tax_collection_myths.pdf
In this Reason Foundation Policy Study, Daryl S. Fleming examines all-electronic tolling, its basic operations plan and business model, the principal factors affecting toll collection costs, and a number of reforms states can make to reduce the cost of toll collection.

23rd Annual Highway Report on the Performance of State Highway Systems
https://reason.org/wp-content/uploads/2018/01/23rd_annual_highway_report.pdf
In this report, the Reason Foundation ranks the performance of state highway systems in 11 categories, including spending per mile, pavement conditions, deficient bridges, traffic congestion, and fatality rates.

State Motor Fuel Taxes
https://www.api.org/oil-and-natural-gas/consumer-information/motor-fuel-taxes/gasoline-tax
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel). 

Alternatives to the Motor Fuel Tax
https://www.heartland.org/publications-resources/publications/alternatives-to-the-motor-fuel-tax 
This report, prepared by the Center for Urban Studies at Portland State University and submitted to the Oregon Department of Transportation, evaluates potential alternatives to motor-fuel taxes. The report also identifies the economic and technological problems that must be addressed when designing alternative revenue sources.

Designing Alternatives to State Motor Fuel Taxes
https://www.heartland.org/publications-resources/publications/designing-alternatives-to-state--motor-fuel-taxes
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes in world in which more fuel-efficient vehicles are rapidly becoming available. They also report on the economic effects of road pricing as a substitute for fuel taxes.

Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-america
In this paper from the Tax Foundation, Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements. In many cases, however, governments exploit the taxes for political reasons, spending them on projects unrelated to roads and other transportation projects.

Research & Commentary: Congestion Traffic Pricing
https://www.heartland.org/publications-resources/publications/research--commentary-congestion-traffic-pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under a congestion pricing model, road operators charge a variable price based on congestion, thereby managing demand and limiting congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.

Raising Gas Taxes Won’t Fix Our Bridges
https://www.heartland.org/publications-resources/publications/raising-gas-taxes--wont-fix-our-bridges
In this paper, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. Moore wrote, “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.”
 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lindsey Stroud, a state government relations manager at The Heartland Institute, at lstroud@heartland.org or 757/354-8170.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR