(Released on 03/18/07)
We warned you it was coming and now some would like to hush the issue by quietly finding solutions that won’t hurt so bad – politically.
The problem is that the state highway fund is headed for a financial crisis not only because over the past ten years lawmakers have raided the highway fund to shore up the general fund, but also because elected officials don’t want to admit that they should have raised highway taxes a long time ago. A long time ago is something like 1991 when the last tax increase took place for the highway fund.
At that time it became apparent that there was about to be a serious crisis in the state general fund and for nearly seven years, revenues from the general excise tax imposed on the sale of motor fuels were being used to stabilize the state highway fund. This strategy was suggested by a task force during the early 1980’s when it was recognized that all of the revenue resources of the state highway fund were based on per unit consumption. In the case of the fuel tax, it is so many cents per gallon which is currently set at 16 cents. In the case of the vehicle weight tax, it is so many cents per pound depending on the total gross weight of the vehicle and in the case of the vehicle registration fee, it is a flat $25 per vehicle charge.
As a result, because these sources are affected by a number of variables, the growth or lack of growth in each source of funding does not keep up with the inflation affected costs of repairing and maintaining the state’s roadways. There were two task forces appointed during the 1980’s to address this issue and in each case the task force members recognized that some resource other than the traditional highway fund resources would be needed to respond to ever rising costs of maintaining the state roadways.
The answer in the case of the first task force was to carve out the receipts of the general excise tax imposed on fuel and put them in the state highway fund based on the reasoning that they are paid by highway users. And, certainly, if the general fund had not been wanting for revenues, this strategy might have prevented the further need to increase highway fund revenues.
When posed with the possibility that the highway fund might lose the general excise tax revenues as a resource, the second task force responded with a recommendation to increase the fuel tax by 10 cents a gallon which at that time was already set at 11 cents a gallon. That meant that the fuel tax would have risen to 21 cents a gallon.
Not wanting to commit political suicide, lawmakers came up with their usual and favorite target, tourists. Thus, was born the idea of slapping a surcharge on rental vehicles and tour vehicles. The rental car surcharge was set at $2 per day while the tour vehicle surcharge was set at either $65 per month for larger tour vehicles or at $15 per month for smaller tour vehicles. This allowed lawmakers to raise the tax on fuel by half of what was recommended by the task force putting the tax on fuel at its current level of 16 cents per gallon.
During the 1980’s the idea of blending alcohol with gasoline as an alternative fuel drew a lot of attention and a temporary exemption from the general excise tax was adopted followed by a permanent exemption in 1988. However, when a tax incentive for building an ethanol plant was adopted by the 2000 session of the legislature, a sunset was placed on the general excise tax exemption for alcohol-blended fuels.
In the meantime, the administration mandated that a certain percentage of all motor fuels be blended with alcohol as an energy conservation measure. That occurred last April. But the general excise tax exemption expired at the end of the year and there was an immediate jump in fuel prices, all of which was blamed on the expired exemption.
Now it has become politically popular to call for the reinstatement of the general excise tax exemption because the higher cost of motor fuels is attributed to the expiration of the exemption. At the same time, lawmakers are calling for making permanent an increase in the rental car surcharge that was raised to $3 per day seven years ago and an increase of 1 cent per gallon in the fuel tax.
The problem with this strategy is that once the exemption is reinstated, it will be very difficult to put the general excise tax back on gasoline. However, it will be a missed opportunity to adopt a highway fund resource that would have the elasticity to meet the inflation driven demand of repair and maintenance costs.
More importantly, for the politically motivated, is the alternative of raising the fuel tax even more in the future as costs outpace the growth in revenues.