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Placement Of Fuel Tax On Nontransportation Use

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By Lowell L. Kalapa

(Released on 04/08/07)

Hawaii’s transportation systems depend on user taxes and fees, that is, those people who use the various transportation modes available in Hawaii pay for the maintenance and repair of the transportation infrastructure.

For example, the state and county highway system is underwritten by the fuel tax on gasoline and other motor fuels, the vehicle weight tax, and the vehicle registration fee. Each of those sources is a measure of how much the taxpayer utilizes the public highways. The fuel tax measures the amount of usage as it determines how many miles a highway user drives over the state and county roads. The weight tax measures the amount of wear and tear the taxpayer’s vehicle will put on the public highways, and the registration fee can be viewed as an admission ticket, allowing the taxpayer to enter the state and county roads. The receipts of all these resources go into the respective state and county highway funds.

Similarly, the tax on aviation fuel is earmarked for the state airport fund and the tax paid by small boat owners goes into the small boat special fund. In the case of larger ships, much of the user charge revenue comes from docking and wharfage charges since the maritime infrastructure is measured by how much those ships use the state harbors.

However, there is an anomaly in the fuel tax in that it is imposed based on the kind of fuel that is being taxed. Generally, there are three types of fuels on which the fuel tax is impose, gasoline/liquid petroleum gasoline, diesel, and alternative fuels such as ethanol, methanol, and biodiesel. However, because diesel is explicitly singled out for a lower rate of one-cent per gallon it, like liquid petroleum gasoline, is taxed at that lower rate when it is used for non-highway purposes. The anomaly is that even if these two sources of fuel are used for off-highway purposes, the collections continue to go into the highway fund.

This anomaly came to light earlier this session when a legislative proposal would have set a one- cent per gallon fuel tax on fuel used for the generation of electricity. It was pointed out that while some electrical plants in the state burn diesel, naphtha has become the fuel that newer electrical generating plants are using. However, the law appears to be silent when it comes specifically to taxing naphtha as a fuel. Thus, industry leaders proposed that since naphtha is becoming a replacement for diesel in electrical generating plants, that the lower one-cent per gallon rate apply to naphtha as well. As a result, industry leaders believed that the state and county fuel taxes would be applied.

While that might appear to be the fairest resolution to the problem of the taxing of naphtha used to generate electricity which is to extend the same rate imposed on diesel burned for electrical generation, one has to question whether or not it is appropriate at all to have users of electrical energy subsidize the state highway system.

Given that Hawaii has some of the highest electric rates in the nation, it would be more logical to exempt any and all fuels used for the production of electricity from the state and county fuel taxes. While it is not a whole lot of tax revenue, it is still an added cost for taxpayers as the cost of the tax is included in the electric rates set by the public utilities commission. For example, all diesel taxed at the one-cent per gallon rate for non-highway use contributed approximately $1.3 million for the calendar year 2006. Since the issue of naphtha has just surfaced, it is unclear how much the one-cent impost would have generated, but since it was not being taxed, the issue of revenue loss is a moot point.

Since the state and county fuel taxes are intended to underwrite the cost of the transportation infrastructure, the question of nexus arises if, in fact, electric energy users are paying a tax that benefits the transportation infrastructure. Given that energy is crucial to the well-being of not only the community at large but also to the state’s economy, it makes little sense to impose a tax on the use of a product that has no relationship to the benefit the tax is designed to provide.

Thus, instead of taxing naphtha at the one-cent per gallon rate like diesel used for off-highway use, lawmakers should consider exempting all fuels used for electrical generation from the state fuel tax.

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