States Test Gas Tax Alternatives

With infrastructure funding down, miles-driven, wholesale taxes among new approaches

Oregon gas tax (CSP Daily News / Convenience Stores / Gas Stations)

PHILADELPHIA -- As the per-gallon gasoline tax model fails to adequately fund infrastructure repairs, states are testing other approaches to make up for shortfalls.

Efforts are afoot in Oregon, California and other states to break free from the gas tax, which detractors describe as poorly suited to keep up with rising infrastructure costs, according to The Pew Charitable Trusts.

"In most places, [the gas tax] is not keeping up with inflation because it's a per-gallon tax and it's not indexed," Norton Francis, senior research associate at the Tax Policy Center, told Pew's Stateline policy analysis blog. "The revenue is not keeping up, and the road construction and other project needs are growing."

Only Florida, Maryland and Massachusetts index their gas tax to inflation. A study by the Institute on Taxation & Economic Policy found that most state gas taxes are "built to fail." Consider that, after accounting for growing construction costs, the average tax rate is down 20% or 6.8 cents per gallon since its previous increase. For the 36 states with a fixed gas tax, the effective gas tax rate has dropped 29% or 9.5 cents per gallon since the last increase, according to the institute's 2011 study.

Meanwhile, the federal gas tax has not been raised since 1993, when it rose to 18.4 cents per gallon. Since then, its value has fallen 40% because of inflation, according to research from the National Conference of State Legislatures. While President Obama signed a bill recently that transfers $11 billion into the federal Highway Trust Fund to prevent it from falling into the red, this is considered only a temporary fix that enabled the U.S. Department of Transportation to continue sending reimbursement payments to state departments of transportation.

With this as a backdrop, states are pursuing alternative approaches. To potentially replace its own per-gallon gas tax, Oregon is pilot testing a "mileage-driven tax," which taxes drivers based on the number of miles they drive. The state is recruiting drivers to volunteer for the program, aiming to have 5,000 participants by spring 2015, and accepting bids from private contractors to test different approaches to calculating mileage.

The pilot will include several contractors, each of which could use a different approach for calculating mileage, James Whitty, manager of the Oregon Office of Innovative Partnerships & Alternative Funding, told Stateline.

One method would be using a device similar to an odometer that counts the number of miles driven. The driver would be refunded for miles driven out of state. More sophisticated approaches include GPS monitoring, a smart phone app or a combination of all the above.

The pilot program's proposed tax rate is 1.5 cents per mile--the current 30-cpg state gas tax rate divided by 20, which is the average car's miles per gallon. Drivers of less fuel-efficient vehicles could actually end up paying less tax overall through a mileage tax, while those with more fuel-efficient models could end up paying more.

In California, State Senator Mark DeSaulnier (D) has sponsored a bill to authorize a pilot program similar to Oregon's, citing a $300 billion shortfall in the state's road maintenance and repair fund that is outpacing the state gas tax.

California's situation is unique considering its embrace of alternative fuels. One-third of hybrid car purchases occur in California, which also incentivizes purchases of electric and hybrid vehicles.

"It is not lost on me that people bought more electric cars and we wanted them to do that," he said. "Now you are punishing them for doing the right thing. But on the other hand, you can't drive on roads that are continuing to deteriorate."

In Virginia, the state eliminated its 17.5-CPG motor vehicle tax on gas and diesel, replacing it with a 3.5% tax on the wholesale price of gas and 6.0% tax on the wholesale price of diesel. It also dedicated some of its general sales tax to go toward the highway fund.

While tax collection is reportedly going well, federal budget cuts and weak sales tax revenues have placed the brakes on the state economy. Michael Maul, associate budget director for Virginia, told Stateline that revenue may end up being lower than anticipated however, the new tax approach still has its benefits.

"What it did do was helped us stabilize when the last of the federal stimulus funds ran out," said Maul. "That was a huge chunk of money. This money allowed us to keep maintenance going, so we were not robbing from construction."

And in Missouri, voters rejected a three-quarter-of-a-cent increase in the general sales tax that could have raised $5.4 billion over the next 10 years for roads. State Sen. Mike Kehoe (R), who sponsored the bill that put the question before voters, said it was not clear what the next step might be. He noted that Missouri has one of the lowest gas taxes in the country and not enough money to repair roads.

"We are going to have to get outside the box," said Kehoe. "Infrastructure safety is the most important thing states can offer."

Click here to read the full Pew report and charts.