Arkansas legislators are now considering a substantial increase in their state’s motor-fuel excise taxes. The plan would increase the gas and diesel taxes in order to pay for road and infrastructure improvements. Arkansas’ gas tax is already high compared to neighboring states, and increased gas prices due to the tax hike would fall most heavily on lower- and moderate-income Arkansans.
Currently, the state gas tax is 21.5 cents per gallon, and the diesel tax is 22.5 cents per gallon. The new proposal would increase the gas tax to 26.5 cents per gallon and the diesel tax to 27.5 cents per gallon. The bill’s sponsors predict the tax increases would generate an additional $100 million in fiscal year 2018. According to the Arkansas Democrat-Gazette, the state collected around $442 million in motor-fuel taxes in fiscal year 2015.
This is not the only tax hike being proposed. The bill also calls for another increase of 3 cents per gallon for gas and diesel for fiscal years 2019–21. The goal for this increase is to raise an additional $60 million per year. The bill’s sponsors have also proposed an additional increase in the highway tax to replace the increases, subject to a vote by Arkansans.
Critics of the gasoline tax increase proposal say 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 on goods and services throughout the economy, not just on gasoline. These increased costs are passed on to consumers.
The main problem with transportation funding is irresponsible government spending, not with tax revenues. 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 only on roads and bridges. In The Wealth of Nations, Adam Smith argues when infrastructure is constructed and maintained utilizing user fees, new construction occurs only when demand justifies it.
The tax hike proposal attempts to limit the misuse of gas tax dollars by requiring 80 percent of the additional state funds be spent on maintenance for highways and roads, but this still leaves millions of dollars vulnerable. Only a few years ago, the Arkansas sales tax was increased to help pay for highways.
Americans for Prosperity-Arkansas noted in a press statement the Arkansas Highway Transportation Department has not proved it can spend new funds properly: “At the time, the Arkansas Highway Transportation Department (AHTD) claimed this would make our state’s highway system ‘among the best in the nation.’ Now, three years later, the highway department is back in front of the legislature pleading for more money. This time around, another tax increase isn’t the answer.”
The Advance Arkansas Institute (AAI) argues there are better funding options that do not involve new taxes. One option AAI proposes is to allow the state Highway Department to access some of the state’s general revenue, which it says would glean the additional highway funding from existing revenue without raising taxes. Another option AAI highlights is state Rep. Joe Jett’s (D- Success) proposal to dedicate 25 percent of any “surplus funds” to fund highways.
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.
Arkansas Shouldn’t Raise State Gas Taxes
Caleb Taylor of the Advance Arkansas Institute criticizes the proposed gas tax hike and makes recommendations for how legislators can improve transportation spending without a tax hike.
How High Are Gas Taxes in Your State?
The Tax Foundation provides a map documenting state gasoline tax rates, using data from a recent report by the American Petroleum Institute.
State Motor Fuel Taxes: July 2015
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
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
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
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
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
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
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.
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