Consistent declines in gas tax revenue have left many states scrambling to fund the maintenance of their critical infrastructure, especially roads and bridges. In Minnesota, legislators have considered several major proposals that would increase the state’s fuel tax or increase fees on licensing, registration, and titles.
The first (and largest) tax hike proposal would have imposed a gross receipts tax of 16 cents per gallon on top of the state’s existing fuel tax of 28.5 cents per gallon. In an attempt to insulate the tax against high prices, the gross receipts tax would only be charged until gas prices hit $2.50 per gallon. When the pump price rises above $2.50 per gallon, the gross receipts tax would become 6.5 percent of the overall price at the pump. This percentage would be determined annually and would be based on the average per-gallon price; the wholesale tax would increase as the price increases.
In addition to the gas tax, the first proposal would also increase Minnesota’s vehicle registration tax from 1.25 percent of a vehicle’s value to 1.5 percent. Late fees would also increase. This proposal passed the state’s Senate, but has stalled in the House.
The second proposal scales back the gas tax increase; it calls for an increase of 5 cents per gallon over the next two years and a 2-cent increase in the third year. Additionally, the proposal would increase the price of vehicle registration. All vehicle owners would pay a $10 surcharge per license plate; older vehicles would pay an additional $20.
Gov. Mark Dayton (D) recently introduced a second proposal that attempts to fund roads and bridges without a gas tax increase, relying heavily on license tab fees instead. According to the Star-Tribune, Dayton’s tab fee hikes would “raise registration for a new $15,000 car from $198 to $265, a 34 percent increase. The cost of tabs for a new $30,000 car would go up from $385 to $509. License tab fees go down as a vehicle ages.” The remaining $200 million in funds would be pulled from the general fund budget.
Critics of these proposals argue they would create unnecessary tax increases during a time when the state is enjoying a budget surplus, and they say the taxes will hit the poor the hardest.
In 2015, Daniel Vock, writing for Governing magazine, analyzed state gas tax data reported to the U.S. Census Bureau and found two-thirds of state fuel taxes have failed to keep up with inflation and fuel-tax-related revenue has dramatically dropped. Additionally, gas taxes disproportionately shift the burden to low-income drivers, a group that typically owns older, less fuel-efficient vehicles. According to Americans for Prosperity, households with incomes of less than $50,000 per year currently spend more than 20 percent of their after-tax income on energy. Although gas prices are comparatively low today, there are no assurances they will remain this way, whereas the gas tax hike would be permanent.
Over the past three years, Minnesota has built a budget surplus on the back of a massive $2.1 billion tax increase on Minnesotans. It is not appropriate to add the burden of additional tax or fee increases on households that are already cash-strapped. A tax hike would raise prices on goods and services throughout the economy, not just on gasoline, because virtually all consumer goods are transported using gasoline-powered transportation. Businesses will simply pass the added costs on to consumers.
As the rise in fuel efficiency continues, motor-fuel tax revenues will continue to decline. States and the national 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 documents provide additional information about how motor-fuel taxes are applied and their effect on the economy.
Alternatives to the Motor Fuel Tax
http://heartland.org/policy-documents/alternatives-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
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 also 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.
Gasoline Fuel Tax Rates as of January 2016
https://www.artba.org/economics/research/gas-tax-history/
The American Road & Transportation Builders Association provides a map documenting state gasoline tax rates, using data from state Departments of Revenue.
State Motor Fuel Taxes: April 2016
http://www.api.org/~/media/Files/Statistics/StateMotorFuel-OnePagers-April-2016.pdf
The American Petroleum Institute documents each state’s current motor-fuel taxes (both gasoline and diesel).
Reconsider the Gas Tax: Paying for What You Get
http://heartland.org/policy-documents/reconsider-gas-tax-paying-what-you-get
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, Brown 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
http://heartland.org/policy-documents/research-commentary-congestion-traffic-pricing
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
http://news.heartland.org/newspaper-article/2013/02/08/fuel-taxes-tolls-pay-only-one-third-road-spending
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
https://heartland.org/policy-documents/raising-gas-taxes-wont-fix-our-bridges
In the aftermath of the I-35 bridge collapse in Minneapolis, Minnesota, 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 Environment & Climate News website at http://news.heartland.org/energy-and-environment, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, atwww.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 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.
