What to Watch in the States: Gas Tax Hikes and Swaps

This is the second installment of our six part series on 2017 state tax trends. The introduction to this series is available here.

State tax policy can be a divisive issue, but no area has generated more agreement among lawmakers across the country than the need to raise new revenues to fund infrastructure improvements. The most common way of accomplishing this goal has been to boost gasoline and diesel tax rates paid by motorists at the pump. Nineteen states have raised or reformed their gas taxes since 2013 and over a dozen states will debate doing so this year.

State and federal gas taxes are the cornerstone of our nation’s transportation finance system. But far too many of these taxes are severely outdated and poorly designed.

The good news is that state lawmakers are becoming increasingly aware of these problems. The governors of states such as Alaska, California, and Minnesota, for example, have already begun advocating for meaningful gas tax increases this year. Legislative leaders in Indiana and South Carolina are also making the case for a higher gas tax in their states.

The bad news is that in other states, such as Tennessee and Wisconsin, lawmakers are using the need for a gas tax update as an excuse to push for cuts in other, unrelated taxes. The final effect of this type of swap would be to boost infrastructure funding, but only at the expense of other core services such as education and public health.

The states where gas tax debates are already taking place this year include:

Alabama lawmakers debated a 6 cent per gallon gas tax increase in 2016 and may return to the issue this year. The Association of County Commissions of Alabama recently endorsed a 3-cent-per-gallon increase and there appears to be some support for the idea in the business community.

Alaska Gov. Bill Walker has proposed tripling fuel tax rates to fund infrastructure at a time when the energy-dependent state’s major revenue streams have been hammered by declines in both the production and price of oil. In a report issued last month, ITEP found that Alaska’s lowest-in-the-nation gas tax rate would remain below average even if the governor’s proposal were enacted.

The chairman of Arizona’s House Committee on Transportation and Infrastructure is seeking to boost the state’s gas tax by 10 cents per gallon. This would mark Arizona’s first gas tax increase in over 26 years. While raising the state’s gas tax would require a two-thirds vote of both legislative chambers, the question could be put on the state’s 2018 ballot by a simple majority vote of the legislature.

California’s gas tax rate is tied to the price of fuel and has fallen dramatically in recent years as that price has dropped. Gov. Jerry Brown has proposed (PDF, page 87) restoring the state’s gasoline tax rate to where it stood in June 2014—effectively raising the rate by 11.7 cents per gallon. The governor has also suggested raising the diesel tax rate by 11 cents and creating a new annual vehicle fee. And to prevent further swings in the state’s fuel tax collections, the linkage to fuel prices would be severed and each tax would instead be indexed to inflation. Notably, Georgia and North Carolina also recently abandoned their price-linked gas taxes in favor of more predictable and sustainable formulas.

Colorado lawmakers appear to agree that the state needs to invest more in its transportation network, though the source of that additional investment has yet to be determined. Gov. John Hickenlooper has suggested asking voters to raise the state’s sales tax rate, while some Republican legislators would prefer to transfer money away from other areas of the state’s budget. Another idea being discussed is to raise the state’s sales tax but to simultaneously cut business property taxes or gas taxes to attract votes in the Republican-controlled Senate.

Hawaii Gov. David Ige proposed a modest, 3-cent-per-gallon gas tax increase in 2016 that ultimately fell short in the state’s legislature. The governor is expected to support a similar increase this year, though House Speaker Joe Souki is reportedly opposed to the idea.

Idaho lawmakers took an important first step toward improving their state’s infrastructure when they approved a 7-cent-per-gallon gas tax increase in 2015. But there is widespread agreement that the increase fell well short of what was needed. Contractors in Idaho have floated the idea of an additional 10-cent-per-gallon gas tax hike to resolve the remaining gap, while Gov. Butch Otter seems to prefer shifting dollars away from other public investments so that money could be spent on transportation instead.

Last year the Indiana House of Representatives approved raising the state’s gas tax by roughly 4 cents per gallon and tying the tax rate to inflation. That proposal ultimately fell short because of opposition in the state Senate and from former Gov. Mike Pence. The likelihood of passage seem to have improved this year, however, as opposition in the Senate has softened and as the state’s new governor, Eric Holcomb, has indicated that he is not vehemently anti-tax. The Indiana House is now debating a proposal to raise the gas tax by 10 cents per gallon and index it to inflation.

Kansas tax collections have taken a major hit in the wake of Gov. Sam Brownback’s tax cuts and the governor is proposing cutting spending on transportation in order to remedy part of the state’s general fund deficit. As an alternative to that plan, the Rise Up Kansas coalition has proposed an 11-cent gas tax increase to fund transportation as well as personal income tax reforms that could remedy the state’s general fund shortfall.

Louisiana lawmakers are likely to debate a sizeable gas tax increase this year. An infrastructure funding task force estimated that an increase of 23 cents per gallon would solve the state’s transportation revenue shortfall. Meanwhile, a separate ITEP study found that a 19-cent increase would be needed simply to restore the purchasing power that the tax has lost since 1990. Moving an increase of that size through the legislature would be a politically heavy lift, though Gov. John Bel Edwards is sending signals that he will pursue some level of increase, noting that “we have significant needs … I hope we can find the will to move forward.”

Minnesota Gov. Mark Dayton recently proposed (PDF) levying a 6.5 percent sales tax on gasoline and raising vehicle registration fees. The gas tax increase is expected to raise approximately $600 million, though legislative leaders say they are opposed to tax increases of any kind. Minnesota’s corn growers reportedly support a 10-cent increase in the state’s gas tax.

The influential Mississippi Economic Council voiced support for a gas tax increase last year and the idea is being considered by Lt. Gov. Tate Reeves and House Speaker Philip Gunn. Mississippi has waited over 28 years since last increasing its gas tax—longer than any state except Oklahoma and Alaska. Last year, Mississippi lawmakers considered pairing a gas tax increase with general fund tax cuts but eventually decided to enact the tax cuts without changing the state’s gas tax rate.

Missouri’s Transportation Department Director said that an update to the state’s two-decade old gas tax rate is a “good area to look” when attempting to address Missouri’s infrastructure revenue shortfall. Whether that recommendation will be taken to heart by the state’s new governor, Eric Greitens, has yet to be seen. Lawmakers have already floated the idea of hiking the state’s gas and diesel tax rates by 1.5 and 3.5 cents per gallon, respectively, though the proposal would need to be approved by Missouri voters because it takes the form of a constitutional amendment.

A broad coalition of Montana businesses, unions, contractors, and local governments is urging state lawmakers to raise the state’s gas tax rate by 10 cents per gallon. Montana’s gas tax rate has been allowed to stagnate for more than 22 years. The push to raise the tax has been receiving significant attention in newspapers around the state.

New Mexico legislators are mulling a 10 cent increase in their two-decade-old gas tax rate as well as an alternative proposal to give localities the option to levy their own gas taxes of up to 5 cents per gallon. Gov. Susana Martinez’s opposition to tax increases will be a major obstacle to passage, but the state’s dire budget situation means that lawmakers will likely engage in a serious tax policy debate this year.

Oklahoma lawmakers are facing a deep budget hole, largely because of income tax cuts and underperforming oil tax revenues. Adding to the problem is the fact that Oklahoma’s nearly 30-year-old gas tax rate has seen its purchasing power fall dramatically, and that lawmakers responded by transferring a large and growing share of general fund dollars into the state’s transportation budget. The state legislature is expected to finally debate a gas tax increase this year. Early supporters include the Oklahoma Policy Institute and the editorial board of the state’s largest newspaper.

Oregon Gov. Kate Brown urged lawmakers to pass a significant transportation funding package in her inaugural address. While she has yet to propose a specific funding source, discussions of a gas tax increase are already underway. The League of Oregon Cities is among the groups backing an increase in Oregon’s gas tax. Republican legislators, however, are indicating that they may not support a gas tax increase unless it is paired with cuts in taxes that fund other areas of government.

South Carolina’s House leadership recently proposed raising the state’s gas tax by 10 cents over five years, increasing the vehicle sales tax, and enacting higher registration fees for hybrid ($60) and electric ($120) vehicles. While former Gov. Nikki Haley insisted that any gas tax increase needed to be paired with an income tax cut, the state’s new governor, Henry McMaster, has yet to weigh in on the issue. South Carolina’s gas tax has not been raised in 28 years and an increase is supported by the South Carolina Chamber of Commerce and at least one member the state’s DOT Commission.

Tennessee Gov. Bill Haslam recently unveiled a plan to boost the state’s gasoline tax by 7 cents and its diesel tax by 12 cents. Tennessee would also join the growing group of states that index their gas tax rates to inflation. The governor would also like to raise vehicle registration fees across the board, with larger fees for electric vehicles. Unfortunately, Gov. Haslam has paired these changes with tax cuts for businesses and successful investors, and a reduction in the state’s sales tax rate on groceries. The net result would be a boost in funding for infrastructure and a reduction in funding for education and other public priorities. Some legislators are discussing an alternative plan that would have a similar overall effect: transferring sales tax dollars out of the general fund to be spent on transportation instead.

Virginia localities in some parts of the state are seeing the revenues raised by their regional gas taxes fall millions of dollars short of projections. Regional gas taxes in Virginia are linked to the price of fuel, so low fuel prices have resulted in low tax collections. Some state lawmakers would like to remedy what they call a legislative “oversight” by establishing a minimum regional gas tax rate, or “floor,” that would be collected even when fuel prices are low. Virginia’s state-level gas tax already contains just such a floor, as do the price-based gas taxes levied in many other states.

Wisconsin Gov. Scott Walker firmly opposes any net tax increase, though he may agree to a boost in the state’s gas tax rate if it is accompanied with tax cuts of equal or greater size. The state Assembly tentatively embraced the idea but its leader, Assembly Speaker Robin Vos, has also said that “I don’t necessarily favor taking money from income and sales tax dollars that could go to fund schools or the university or somewhere else and transferring that into the transportation fund when we know we have needs there.” Because Gov. Walker is unlikely to sign a gas tax increase unless it includes exactly this type of swap, Speaker Vos is reportedly growing more pessimistic about the chances of reaching an agreement in 2017.

For more information on state gas taxes, read:

How Long Has It Been Since Your State Raised Its Gas Tax? (updated January 2017)

Most Americans Live in States with Variable-Rate Gas Taxes (updated January 2017)

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