States, feds look for answers to falling gas tax revenue

Guest post courtesy of IU Newsroom intern Annie Brackemyre

America’s system for financing road construction and repair is broken. Gas tax revenue is coming in below target, states are being forced to spend their highway funds to pay down debt, and federal assistance is the only cushion maintaining a positive cash flow for road repairs in most states.

The situation has legislators across the country paying close attention as states like Oregon attempt to recoup falling tax revenues by replacing traditional gas taxes with new methods of benefit principle taxes.

Gas tax revenue chartBut recent Indiana University research shows that, at best, one in three Americans support these benefit-based taxes. The article, “Demand for Benefit Taxation: Evidence From Public Opinion on Road Financing,” gauged public opinion on funding roads with benefit-based revenue sources.

The benefit principle, an idea that people should pay for the goods and services they consume in proportion to the benefits received from those goods and services, has fueled talk of mileage user fees, which tax car owners based on miles driven.

In contrast, the current gas tax system adds an automatic charge at the pump. In Indiana, it’s 36.4 cents per gallon, including the 18.4 cent federal gas tax.

States rely on a mix of federal, state and local taxes to fund their transportation costs. Indiana is heavily reliant on federal funding. Over 40 percent of Indiana’s transportation funding comes from federal gas tax revenue that is distributed by the Department of Transportation’s Highway Trust Fund. The remainder of the state’s revenue comes from state and local gas taxes.

The existing system is failing in large part because the federal rate has not been raised since 1993. Since then, politicians in Washington on both sides of the aisle have run away from raising the tax. However, legislation is just starting to make its way to the floor as politicians grapple with the reality that, unless they find a solution by June 1, the Highway Trust Fund will not have the money to remain operational.

The gas tax system was built on the assumption that drivers using American roadways should pay for road maintenance. However, the number of drivers has decreased and fuel efficiency is improving steadily every year. As a result, the federal and state coffers are almost dry. The Congressional Budget Office projects that the fund will be unable to fulfill all of its obligations in fiscal 2015 and will face a cumulative shortage of $169 billion over the next 10 years.

The federal government brought the debate to a brink last July when it was forced to allocate money from the general fund to keep the Highway Trust Fund operational.

Highway Trust Fund shortfallAt the state level, many states are looking at raising their gas tax as an option instead of a complete system overhaul that could favor the benefit principle style of taxation.

Iowa took this approach. Starting last Sunday, the gas tax increased statewide by 10 cents. Polls show that Iowans are sharply split on their support for the increase with 50 percent in opposition, 48 percent in support and 2 percent unsure. What is clear is the benefit to the state: The increase is projected to bring an additional $215 million for city, county and state roads.

In Indiana, the state Chamber of Commerce is suggesting allocating more state sales tax dollars for roads and indexing the state gas tax to inflation, allowing it to increase naturally. The Indiana General Assembly commissioned a study due to come out this summer that will look at alternate funding choices, including the mileage user fee system.

Indiana University researchers who conducted the original benefit principle study are currently working on new research that looks specifically at the opinion of Indiana residents in response to mileage user fees. The results of that study will come later this year.

Oregon will launch the country’s first road user fee program, OReGO, open to volunteers this July. If the volunteer system proves a success, the state plans to implement a mandate system which will replace all taxes paid at the pump. Drivers will have the option to choose from a variety of mile-tracking devices including smartphone apps, trackers that plug into the car and manual reporting of the odometer. Participants then receive a bill for their distance driven which includes an automatic fuel tax credit for the fees paid at the pump.

In addition to raising revenue, Oregon’s system will likely see the added benefits of participants driving less, which decreases congestion and is environmentally friendly.

State and national legislators are eager to watch Oregon’s policy unfold as they consider alternate funding options. However, as public support for mileage user fees remains low and organizations like the American Civil Liberties Union voice privacy concerns, any change on the national level is sure to be slow.

Charts are from Pew Charitable Trusts.

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