Research and Commentary: Gas Tax Increases Will Hurt the Kentucky Economy

Published March 12, 2020

To offset decreasing revenues available for transportation projects, Kentucky lawmakers have very recently proposed House Bill 580, which, if enacted, would raise nearly $500 million dollars to ostensibly shore up a lagging transportation project backlog. The measure would fully phase-in by January 1, 2021. The gas tax would take effect just in time for the summer driving season, beginning on July 1 of this year.

Yet, the proposal isn’t simply a gasoline tax. It also hikes registration fees for nearly all types of vehicles and even goes so far as to limit trade-in value on vehicle purchases. This particular provision is insidious insofar as it is meant to artificially inflate prices of cars so that more sales tax revenue is generated.

Gasoline taxes are an unreliable funding source for state transportation projects, road construction, and maintenance due to declining gasoline prices and more fuel-efficient vehicles. In 2015, Daniel Vock, writing for Governing, analyzed state gas tax data reported to the U.S. Census Bureau and found two-thirds of state fuel taxes failed to keep up with inflation.

Moreover, gasoline taxes are regressive and produce widespread economic consequences. Increasing fuel taxes leads to higher prices on all goods and services throughout the economy. These additional costs are inevitably passed on to consumers, with an especially negative impact on lower- and middle-income families.

In a Maryland Public Policy Institute study, Wendell Cox and Ronald Utt argue gas taxes have a significantly greater detrimental effect on lower- and middle-income families than they do on the wealthy. Americans for Prosperity estimates lower gas prices amount to approximately $100 in additional spendable income per month for an average family.

The main reason for inadequate transportation funding is not lack of revenue. Actually, too many dollars are spent on projects unrelated to roads, such as rail, bike paths, and museums. A new proposal from Kentucky lawmakers calls for an increase in the state’s motor fuel taxes and saddle car, truck, and motorcycle owners with doubled registration fees.

Under the proposed plan, Kentucky drivers will pay 9 cents per gallon more for gasoline, increasing from 26 cents to 34.4 cents per gallon. As neighboring states like West Virginia explore ways to be more economically competitive and alluring, Kentucky can ill-afford to add increasing costs on consumers and businesses.

Increasing the gas tax will not resolve transportation revenue shortfalls due to more fuel-efficient vehicles and the rise of electric automobiles. The growth in fuel-efficient cars has decreased motor-fuel tax coffers and disproportionately shifted the transportation tax burden to low-income drivers, a group that typically owns older, less-fuel-efficient vehicles. In several states, the gas tax has become increasingly inefficient, with revenue falling far short of estimated goals; this has left a deficit that legislatures are struggling to fill. Increasing what has proven to be a failing tax is not the answer.

Owning a car is already expensive in Kentucky. According to a report by U.S. News and World Report, Kentucky is in the top half of the most expensive states to own a car. It is not appropriate to add the burden of additional tax or fee increases on households that are already cash-strapped. Even worse, a gas tax hike would raise prices on goods and services throughout the economy because virtually all consumer goods are transported using gasoline-powered vehicles. In fact, nearly 70 percent of all freight transported annually in the United States, accounting for manufactured and retail goods worth $671 billion, is transported by truck, according to Businesses will simply pass the added costs on to consumers.

Michael Brendan Dougherty of the National Review summed up the unforeseen effects of a gas tax hike well in an April 2019 article:

Gas taxes are insidiously regressive. They don’t just impose extra costs on those who commute long distances. Over time the raised fuel costs of trucking, delivery, fertilizing, and harvesting flow through to everything. You wake up and every bite of corn flakes is more expensive. Your morning commute is of course more expensive. The tax gets priced into your property tax bill, which goes up to pay the higher fuel bill for the fleet of school buses for public schools. Snowplow services become more expensive. A gas tax like this follows people everywhere.

One reform that should be avoided is automatically indexing future gas tax increases to commodity prices or the Consumer Price Index. Indexing is problematic because it makes politicians and regulators less accountable for tax changes and can place upward pressure on the very measures used to determine the rate.

With the current volatility in the global economy, adding new taxes is likely to exacerbate challenges Kentuckians may be wrestling with in the coming months, if not years.

The following documents provide additional information about how motor-fuel taxes are applied and their effect on the economy.

FAQ: How do Gasoline Tax Hikes Affect Cross-Border Competition?
In this FAQ, Matthew Glans examines the effect of gasoline tax changes on the price of fuel, availability of stations, and the overall impact on consumers and the economy across state borders.

Policy Tip Sheet: Gas Taxes are not the Long-Term Solution to Funding Transportation
In this Policy Tip Sheet, Matthew Glans examines gasoline taxes, how they have become less effective over time, and why states can no longer rely on them to fund state transportation projects.

Dispelling the Myths: Toll and Fuel Tax Collection Costs in the 21st Century
In this Reason Foundation Policy Study, Daryl S. Fleming examines all-electronic tolling, its basic operations plan and business model, the primary factors affecting toll collection costs, and a number of reforms states can make to reduce the cost of toll collection.

23rd Annual Highway Report on the Performance of State Highway Systems
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.

State Motor Fuel Taxes
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel). 

Alternatives to the Motor Fuel Tax 
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–motor-fuel-taxes
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes in a world in which more fuel-efficient vehicles are rapidly becoming 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 
In this paper from the Tax Foundation, 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 projects. 

Research & Commentary: Congestion Traffic Pricing–commentary-congestion-traffic-pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under a congestion pricing model, road operators charge a variable price based on congestion, thereby managing demand and limiting congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion. 

Raising Gas Taxes Won’t Fix Our Bridges–wont-fix-our-bridges
In this paper, 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.

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