Is The Gas Tax Working?
The House Ways and Means Subcommittee on Tax Structure is continuing its study of Louisiana’s tax structure with a discussion on the gasoline tax. We have previously written on their study of the sales tax, income tax, and severance tax.
The state gas tax is currently 20 cents on the sale of each gallon of gasoline, paid by the distributor when the gas is sent to the station, and is built into the price of a gallon of gasoline you pay when you fill your car at the pump. The federal gas tax is also included in that price and is 18.4 cents per gallon. The gas tax can be considered a “user fee,” meaning those who use the transportation system pay the tax.
Louisiana’s gas tax of 20 cents is broken down into two pieces. Sixteen cents go into the Transportation Trust Fund (TTF), used for the operations of the Louisiana Department of Transportation and Development (DOTD), the construction of new roads, maintenance and repair of existing roads, and other miscellaneous uses. The remaining four cent tax was put in place in 1989 for a program called TIMED (Transportation Infrastructure Model for Economic Development), that was supposed to be completed in 2005, to bond out and fund 16 projects around the state, including the construction of roads, bridges, ports, and airports.
Prior to 1990, the gas tax was 16 cents, and all the funds went into the state general fund, and DOTD’s appropriation for both the capital and operating budget came out of the general fund. In 1990, this tax, automobile registration fees, and tax on aviation fuels, was dedicated to the Transportation Trust Fund. The total revenue in fiscal year 2021 for all the taxes that go into the Transportation Trust Fund was $610 million. This fund is used for various projects, including flood control, highways, ports, funds to local governments, and the operating budget of the department. The last few TIMED projects, still in progress, are having to be paid out of the 16 cents, since the 4 cents is being used to pay the debt service on the previous projects.
While the revenues from the gas tax have increased since its inception due to increases in the number of cars and drivers, the rate of increase is slowly declining. Cars are getting more efficient in their use of gasoline, and hybrid and electric vehicles can use the roads while paying little to nothing in taxes. Some states have been raising their gas tax in recent years to make up for these issues, while others are implementing taxes on hybrid and electric vehicles to make up for the loss.
In fact, Louisiana recently enacted a $100 fee on electric vehicles that will go into effect in 2023. Given all these issues, if the state wishes to continue building transportation infrastructure with “user fees,” perhaps the gas tax is no longer the best way to do this. In an effort to increase the viability of the Transportation Trust Fund, the legislature in 2022 dedicated the revenues from sales taxes paid on vehicles to the TTF.
Not only are revenues increasing at a lower rate, but inflation is taking its toll on the cost of building those roads and bridges. According to figure 1, provided by DOTD, construction costs have increased a whopping 88% in the last two years! This is rapidly eating away at the purchasing power of the current gas tax. Why has it increased so much so fast? There are several factors at play here.
First, the price of oil has nearly doubled in the last two years, causing an increase in the price of asphalt, which is an oil-based product. On top of that, labor and prices of other construction materials have continued to rise. In addition, the federal government passed several spending bills in the wake of the COVID-19 pandemic that increased the demand for government-led construction, further driving up costs. Not to mention that construction materials demand has increased even further in the south in the wake of a series of very destructive hurricanes. In fact, the state is set to receive an influx of nearly $6 billion from the federal government over the next four years for transportation infrastructure as a part of the pandemic spending spree. However, the true value of those dollars has already been eroded. Because of the inflationary spending, the number of projects that could have been funded with this money has been cut in half.
Another issue that reduces the efficiency of the state gas tax is the ratio of state to local roads in Louisiana. Compared to other states, Louisiana has a very large state road system, accounting for 27% of the road miles, whereas the national average of state road to total road miles is 19%. Louisiana also has the fourth most bridge miles in the country which are significantly more expensive to build and maintain than roads alone. All this further cuts into the ability of the state to maintain the roads in its system.
With the increases in annual state gas tax collections no longer keeping up with the inflation of construction projects, the capacity of the state to build and maintain its transportation infrastructure is rapidly diminishing. There are some actions that the state can take to correct some of this. First, the state has four years to obligate the funds it will receive from the federal government. DOTD should consider delaying the implementation of any new construction contracts as long as possible to see if costs come back down to a more reasonable level. Second, it is clear the gas tax is no longer a viable long-term solution to maintaining its revenue levels. Other options for funding road maintenance and construction should be considered, like un-dedicating the gas tax, placing those funds in the state’s general fund, and then funding DOTD like any other state priority. Lastly, the state should reduce its obligations for maintenance by offloading roads that should be considered local responsibilities.
Sometimes patching, repair, and rehabilitation of roads and bridges are no longer enough and reconstruction has to happen. Louisiana’s plan for funding transportation infrastructure is nearing that stage, and lawmakers would be wise to begin that planning in earnest sooner than later.