The Stubborn Gasoline Tax: It's Hard to Increase, Hard to Reduce

 
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Despite substantial electoral risk, Connecticut's legislature agreed last week to a budget that raises the sales tax, the personal income tax and taxes on alcohol, tobacco and hotels. But there was one increase that legislators deemed too great a risk. They rejected Governor Dan Malloy's plan to increase the gasoline tax by three cents a gallon.

Sensitivity to raising gas taxes may come as no surprise. But cutting them can be problematic as well. Not far from Connecticut, the New Hampshire House voted last month to suspend five cents of its gas tax for two months. The bill now seems to be dead. Both Democratic Governor John Lynch and senators in the Republican majority said it would divert too much money from the state's roads.

The situations in Connecticut and New Hampshire are a reasonable synopsis of where the politics of the gas tax stand today. There's increasing pressure to cut gas taxes because gas prices are rising. At the same time, there's increasing pressure to raise gas taxes because its revenues are stagnating as cars become more fuel-efficient. In most places, what that means is that lawmakers won't do anything at all.

In many states, this inertia has existed for years. In New Hampshire, for example, the tax has stood at 13 cents per gallon for the last 20 years. Those 13 cents are worth far less in real dollars than they were back then. At some point, something has to give. More states are starting to explore new ways to fund transportation that don't count on the gas tax. What they're finding, though, is that every possible solution comes with perils of its own.

A stationary tax

New Hampshire isn't the only state that's talked about cutting its gas tax this year. Lawmakers in Indiana and North Carolina have, too. Even when adjusted for inflation, gas prices this April were at their highest point ever except for a brief period in 2008. If prices at the pump continue to rise over the summer, the subject is likely to come up in more places.

So far, though, action appears a good bet only in Maine, where lawmakers may end the indexing law that automatically raises the gas tax in line with the rate of inflation. 

There are several reasons why it's so hard to find states taking action. One is that their ongoing budget problems mean that any tax cut adds to the existing shortfall. Then there's the question of what a reduced gas tax really accomplishes. Lawmakers — and economists — often question the extent to which drivers actually receive the benefits of lower gas taxes as opposed to businesses keeping the difference for themselves, although one study of gas tax moratoriums in Illinois and Indiana a decade ago did show that most of the price reduction was passed on to consumers.

The biggest reason for the reluctance to cut gas taxes, though, is that while gas prices are at record levels, gas taxes are not. They don't work like most other taxes. If the price of a pair of designer jeans goes from $50 to $100, the sales tax on it will double. If someone's income goes from $50,000 to $100,000 in a state with a flat personal income tax, the state's haul will double. 

But gas taxes are typically applied on a per-gallon basis rather than as a percentage of the price. If gas goes from $2 a gallon to $4 a gallon, states don't bring in any more money, except in the minority of states that index their gas tax to inflation or that apply a general sales tax to gas purchases.
Meanwhile, cars are becoming more fuel-efficient and high gas prices are helping limit how much people drive. The end result is dwindling receipts for a tax that is most states' key source of transportation funding.

Transportation funds run dry

Last year, when New Jersey Governor Chris Christie abandoned a plan to build a new train tunnel to Manhattan, it made national news. Only months later did it become fully clear why the governor made the decision. Christie's plan was to use the savings to bolster the state's transportation trust fund, which is dependent on gas taxes, unchanged since 1988 - and which was set to run out of money for anything but debt service this year.

The problem will only get worse, in New Jersey and elsewhere. For example, a study in Washington State forecast that in 2025, drivers there would pay around 40 percent less in gas taxes, adjusted for inflation, than they did in 2009.

That kind of research steps up the volume of suggestions that the gas tax needs to be raised, not lowered. Usually, though, the suggestions don't get further than the talking stage. The politics are hard, especially when gas prices are at record highs. "There is one tax the business community universally supports — the gas tax," Maryland Governor Martin O'Malley recently told the Baltimore Sun . "There is one tax the general public universally opposes — the gas tax."

At the federal level, the normally tax-averse U.S. Chamber of Commerce supports a gas tax increase. Yet the federal tax hasn't been raised since 1993.

In Connecticut, legislative Democrats rejected Governor Malloy's gas tax increase even though the tax was cut by 14 cents a gallon in the late 1990s and early 2000s and even though the state's transportation fund has struggled with deficits in recent years. The state does have a second tax on gas that is indexed for inflation, but money from it often has been used to boost the general fund, not pay for transportation projects.
Lawmakers said they didn't want to raise a tax that hits the poor the hardest. They also likely were concerned about the electoral implications of increasing a tax that just about everyone has to pay. "I think it was just a political reality," says Oz Griebel, CEO of the MetroHartford Alliance, a regional economic development organization.

False starts

This reality isn't new. Nor is the realization that states must either raise their gas taxes or find alternative ways to pay for transportation. Griebel chaired a Connecticut board that called for a gas tax increase in 2003. "Even then," he says, "you didn't need to be a genius to see that as slowly as the nation may be moving to more fuel- efficient vehicles, they are more fuel-efficient."

The trouble is that many of the alternatives have themselves been false starts. Toll roads are controversial in their own right, especially if the tolls are used to pay for ongoing transportation costs, rather than for merely building a road. Connecticut removed its tolls in the 1980s after a fatal accident at a tollbooth. The state has debated bringing them back just about ever since, but still hasn't done so.

Several years ago, Oregon conducted a much-watched pilot project to track drivers' mileage and charge them by the amount they drove. Four years later, that idea is still far from a reality largely because of the difficulty of attaching mileage-tracking devices to every car on the road. Federal action would likely be necessary to make a miles-traveled tax work.

Given such setbacks, states are turning to options that may not be sustainable. They're using their general funds to pay more for transportation, even though general funds face other substantial pressures. In Utah, where the gas tax was last raised in 1997, lawmakers voted last week to dedicate 30 percent of growth in sales tax revenue to transportation, overriding Governor Gary Herbert's veto.

Some states are still trying to find new answers that will work for the long-term. Washington State is considering a $100 annual fee on electric cars — less than most drivers of conventional vehicles pay in gas taxes today, but enough so that all drivers are paying something for the roads on which they drive. It wouldn't bring in much money right away, but if electric cars become more popular it could eventually become a solid supplement to the gas tax.

Yet that idea has sparked a fight in the legislature. Electric car advocates wonder why they should have to pay when the technology is still in its infancy and when the cars will help the state achieve its environmental goals. 

Washington's experience underscores the fact that there's no politically easy way to pay for transportation. Mary Margaret Haugen, the Washington Senate's Transportation Committee chair who's sponsoring the fee, says she wishes the state had moved on the idea before this year. "You need to get the way you pay for things on the books," Haugen says, "before [the opponents] hire a lobbyist."
 
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