Minnesota Gov. Mark Dayton (D) has proposed a 6.5 percent increase to the state’s excise tax on gasoline at the wholesale level, an increase of 16 cents per gallon over the next four years. In addition, Dayton’s proposal would add a half-cent increase in the sales tax in the seven-county Minneapolis-Saint Paul metro area to fund mass transit improvements. The tax hike proposal passed the Minnesota Senate by a vote of 36 to 27.
Minnesota’s current state gasoline tax rate of 28.5 cents per gallon is greater than the national average of 20.7 cents per gallon. The tax is designated exclusively for road and bridge construction. The gas tax hike would be the largest in the state’s history and give Minnesota the 5th highest gas tax nationally. Minnesota drivers would be required to pay 44.5 cents in gas taxes if it is adopted. The tax increase would make the state even less competitive than its neighbors and would strongly affect border towns, where consumers can more easily cross state lines to purchase fuel.
While gas taxes are low today, there are no assurances that they will remain this way while the gas tax hike would be permanent. Critics of the gasoline tax increases argue legislators should not use the current dip in gasoline prices as an excuse to hike taxes, and they note a tax hike would raise prices not just on gasoline but also on goods and services throughout the economy. These increased costs would be passed on to consumers and would cause more harm to lower- and middle-income families, acting as a regressive tax hike.
According to Americans for Prosperity (AFP), households earning less than $50,000 per year currently spend more than 20% of their after-tax income on energy. Lower gas prices also promote economic growth. AFP Nebraska estimates lower gas prices amount to $108 in additional spendable income monthly per household, and economists have estimated low gas prices nationally will save consumers $120 billion over the next year. Americans for Prosperity Minnesota also contend the tax hike is unnecessary, as the Minnesota budget already has a $1 billion surplus.
The main problem with transportation funding lies not with revenue but with spending. Far too many dollars are spent on projects unrelated to roads, such as bike paths and museums. If gas taxes are intended as a user fee, gas-tax dollars should be spent on roads alone. In The Wealth of Nations, Adam Smith argues when infrastructure is constructed and maintained using user fees and decentralized, new construction occurs only when market demand justifies it.
As the rise in fuel efficiency continues, motor-fuel tax revenues will continue to decline. States and the federal government will have to explore more modern and efficient ways to fund road construction and traffic infrastructure. These include privatizing roads and establishing toll systems. In several cities, transportation agencies are using congestion pricing – varying toll prices based on congestion – to manage demand and limit traffic problems.
The following articles examine how motor-fuel taxes are applied and their economic effects from multiple perspectives.”
Why is Raising Taxes Always the Answer to Our Problems
http://freedomfoundation.publishpath.com/why-is-raising-taxes-always-the-answer-to-our-problems
Annette Meeks of the Freedom Foundation of Minnesota discusses Dayton’s proposed tax increases, including his gas tax increase, and questions why increasing taxes appears to be legislators’ only plan to solve budget problems or increase revenue. “Combined, local governments and MNDoT spend close to $5 billion each year on roads, bridges, bus and rail transit, airports and other transportation-related projects. This amounts to spending nearly $1,000 per resident of the state on transportation. When I’m stuck in traffic or drive into a jarring pothole, I often wonder where all of this money goes.”
Gas Tax Hikes Are Not the Answer
http://www.forbes.com/sites/realspin/2015/03/06/gas-tax-hikes-are-not-the-answer/
Christine Harbin Hanson of Americans for Prosperity examines the efforts of several governors to increase their gas taxes. Hanson argues current low gas prices shouldn’t be an excuse to raise taxes. “For most Americans across the country, the lower prices at the gas pump have had a direct positive impact on everyday living. The average price of a gallon of gasoline hovers around $2 across the country, saving the average household about $100 every month.”
State Motor Fuel Taxes: January 2015
http://www.api.org/~/media/files/statistics/state-motor-fuel-excise-tax-update-jan-2015.pdf
The American Petroleum Institute documents current motor-fuel taxes (both gasoline and diesel) of each state.
Alternatives to the Motor Fuel Tax
https://heartland.org/publications-resources/publications/alternatives-to-the-motor-fuel-tax?source=policybot
This report, submitted to the Oregon Department of Transportation, from the Center for Urban Studies at Portland State University evaluates potential alternatives to motor-fuel taxes. The report also analyzes the economic and technological problems that must be addressed when designing alternative revenue sources.
Designing Alternatives to State Motor Fuel Taxes
http://heartland.org/policy-documents/designing-alternatives-state-motor-fuel-taxes
Writing in Transportation Quarterly, Anthony M. Rufolo and Robert L. Bertini consider the future of motor-fuel taxes as more fuel-efficient vehicles become available. They report on the economic effects of road pricing as a substitute for fuel taxes.
Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-america
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 improvements.
Reconsider the Gas Tax: Paying for What You Get
https://heartland.org/publications-resources/publications/reconsider-the-gas-tax-paying-for-what-you-get?source=policybot
Jeffrey Brown of the University of California-Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of this purpose and lump it together with other unpopular taxes. The challenge for policymakers, he argues, is to restore the connection in the public’s mind between the tax and the roads it should provide.
Research & Commentary: Congestion Traffic Pricing
https://heartland.org/publications-resources/publications/research–commentary-congestion-traffic-pricing?source=policybot
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under congestion pricing, operators of a road charge a variable price based on congestion, allowing the operator to manage demand and limit congestion. Heartland Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion.
Fuel Taxes, Tolls Pay for Only One-Third of Road Spending
https://heartland.org/news-opinion/news/fuel-taxes-tolls-pay-for-only-one-third-of-road-spending?source=policybot
Joseph Henchman of the Tax Foundation finds highway user taxes and fees made up just 32 percent of state and local spending on roads. Financing for the rest of the projects came out of general revenues, including federal aid.
Raising Gas Taxes Won’t Fix Our Bridges
http://reason.org/files/59f2e045a676b9c69bb9139b2c217bf3.pdf
In the aftermath of the I-35 bridge collapse in Minneapolis, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems. He 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 Tax News website at https://heartland.org/topics/taxes/index.html, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s state government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.