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Research & Commentary: The Failure of Gas Taxes in Kentucky

September 20, 2018

In this Research & Commentary, Matthew Glans examines Kentucky's gas tax, how it fails to generate needed revenue for transportation projects, and the need for a new source of road funding.

Like many states, Kentucky faces a backlog of more than $1 billion in road paving projects in addition to more than 1,000 bridges in need of repair or replacement. Many are blaming the shortfall in gas tax revenue. However, this shortfall is not surprising given gasoline taxes are ineffective and have increasingly left transportation systems shortchanged.

Under Kentucky law, the state’s gas tax rate is adjusted every three months based on the average wholesale price of gas. Furthermore, this rate cannot increase by more than 10 percent per year. However, when gas prices fall, the tax revenue declines, but the cost of infrastructure repair costs remains steady at worst, and generally increases over time.

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.

By law, Kentucky’s tax cannot drop below 26 cents per gallon, which is where it currently stands. Kentucky legislators should consider shifting from this variable rate tax structure. However, it is important Bluegrass State lawmakers avoid an increase in the tax as well. A flat gas tax, which is used in 32 states, could help stabilize Kentucky’s road fund and leave it less vulnerable to fuel price fluctuations.

During the 2018 session, a major gas tax increase was proposed in the Kentucky House that would have increased the gas tax by a minimum of 10 cents. Unfortunately, this would have cost Kentucky drivers more than $250 million per year. The bill would have also imposed a 13-cent hike on diesel fuel, a new $100 registration fee for electric and hybrid vehicles, an increase in the cost of attending state traffic school from $15 to $50, and an increase in the fee for registering a vehicle with a county clerk from $11.50 to $22.

In response, Americans for Prosperity-Kentucky State Director Andrew McNeil said, “Proposing a new gas tax hike will hit drivers right where it hurts the most: their pocket-books. It’s time for legislators in Frankfort address necessary reforms to curtail their excessive spending and start to prioritize projects to fix our roads, bridges, and infrastructure in a fiscally responsible way.”

Any proposal that increases gasoline taxes ignores that mounting evidence reveals gasoline levies are a regressive form of taxation that have increasingly left transportation systems shortchanged. In recent years, the rise of fuel-efficient cars has decreased motor-fuel-tax coffers and disproportionately shifted the burden to low-income drivers, a group that typically owns older, less-fuel-efficient vehicles.

A tax hike would raise prices on goods and services throughout the economy, not just on gasoline, because virtually all consumer goods are transported using gasoline-powered vehicles. Businesses will simply pass the added costs on to consumers. Kentucky legislators should explore modern and efficient ways to fund road construction and traffic infrastructure, such as privatizing roads and establishing toll systems. In several cities, transportation agencies are using 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 the impact they have on states’ economies.


State Motor Fuel Taxes: July 2018
https://www.api.org/~/media/Files/Statistics/State-Motor-Fuel-Taxes-Report-July-18.pdf
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel). 

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.

Alternatives to the Motor Fuel Tax
https://www.heartland.org/publications-resources/publications/alternatives-to-the-motor-fuel-tax?source=policybot
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?source=policybot
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes as more fuel-efficient vehicles become 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 
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 improvements. 

Reconsider the Gas Tax: Paying for What You Get
https://www.heartland.org/publications-resources/publications/reconsider-the-gas-tax-paying-for-what-you-get?source=policybot
Jeffrey Brown of the University of California–Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of this purpose and lump it together with other unpopular taxes. The challenge for policymakers, Brown argues, is to restore the connection in the public’s mind between the tax and the roads it should provide.

Research & Commentary: Congestion Traffic Pricing
https://www.heartland.org/publications-resources/publications/research--commentary-congestion-traffic-pricing?source=policybot
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under congestion pricing, operators of a road charge a variable price based on congestion, allowing the operator to manage demand and limit congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion. 

Fuel Taxes, Tolls Pay for Only One-Third of Road Spending
https://www.heartland.org/news-opinion/news/fuel-taxes-tolls-pay-for-only-one-third-of-road-spending?source=policybot
Joseph Henchman of the Tax Foundation finds highway user taxes and fees made up just 32 percent of state and local spending on roads. Financing for the rest of the projects came out of general revenues, including federal aid.

Raising Gas Taxes Won’t Fix Our Bridges
https://www.heartland.org/policy-documents/raising-gas-taxes-wont-fix-our-bridges
In the aftermath of the I-35 bridge collapse in Minneapolis, Minnesota, 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 John Nothdurft, Heartland’s director of government relations, at john@heartland.org or 312/377-4000.

Article Tags
Taxes Transportation
Sub-topic
Taxes: Gas Tax
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