How Vermont Raised Its Gas Tax

State leaders say they had no choice to find new gas tax revenue since they risked losing federal funds.
by | May 17, 2013
The Tax Foundation

Vermont isn’t the only state that addressed transportation revenue this spring, but it’s unusual in one regard: its gas tax took effect almost immediately after it became law.

On Monday, April 29, Gov. Peter Shumlin signed a new gas tax into law. On Wednesday, it went into effect. How’d Vermont do it?

Three key reasons, says Richard Watts, assistant Research Professor with the Transportation Research Center at the University of Vermont. The tax hike was tied to an obvious need, the legislative process moved quickly, and it had support from state leadership.

The state entered last year’s legislative session facing a shortage of about $20 million in funding needed for transportation. For the short-term, it dealt with the crunch by raising motor vehicle fees and issuing bonds. But the situation also prompted the creation of a commission to study the funding problem for the long-term. It concluded that there was a $240 million gap, each year, between all state spending on transportation and what the system actually needed.

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The report didn’t make specific policy recommendations, but the message was clear: something needed to be done. “The publication of that report really opened up a lot of eyes,” says Vermont Transportation Secretary Brian Searles, who served as the commission chair.

By the time the 2013 session started, Shumlin and legislative leaders knew that the next transportation shortfall, about $36.5 million, couldn’t be papered-over with short-term solutions like they had done the previous year. The administration quickly offered its proposal for a gas tax hike, while both the House and Senate transportation committees worked on their own versions.

The work was especially pressing: state leaders learned that if they didn’t figure out how to raise more money, they risked losing $56 million in federal funds by failing to fully meet their required match. With more than $50 million in recovery work in their budget for improvements still needed in the wake of Hurricane Irene, it was clear they had no choice but to figure out a way to generate new revenue and save their federal funds in the process.

The initial proposal, from the Shumlin administration, was relatively simple one: a gas tax hike that would be the equivalent of about 8.5-cents-per-gallon. The tax was split evenly between a traditional per-gallon tax and a percentage tax assessed at the distributor level. It also proposed $8.5 million in transportation bonds.

Meanwhile, the House and Senate transportation committees got to work on their own proposals. Both wanted to raise more revenue but they had some differences in their approach. The House wanted the gas tax indexed to inflation; the Senate didn’t. The House didn’t want a diesel tax; the Senate did.

Eventually, the House and Senate leadership, along with Shumlin, came to an agreement before a legislative conference committee ever had to meet to hash out the difference between the gas tax bills. “We both were in agreement on the approach we’d take,” says Patrick Brennan, chair of the House Transportation Committee. “We had to do some fine tuning, but in the end, we both raised money.”

The final deal resulted in a net gas tax increase of 5.9-cents-per-gallon on top of the existing 19-cents-per-gallon gas tax. The hike includes a new 2 percent assessment on the price of gasoline while slightly decreasing the per-gallon tax by .8 cents. By FY 2016, the tax could amount to a net hike of 6.5 cents, says Brennan.

The idea of tying it to the wholesale price of gasoline was to ensure the gas tax rose as the price of gas did too, since historically, gas taxes lose purchasing power over time.

The plan also includes a diesel tax that’s the equivalent of a 3-cent-per-gallon hike over two years. Those changes, along with $11 million bonds, means about $32 million in new transportation funds next year, says Searles.  The bill includes a provision that the new fuel tax assessment "shall be used exclusively for transportation purposes and not be transferred from the Transportation fund."

The legislation had overwhelming support in both chambers of the legislature.

And by having the law take effect immediately, the state was able to collect a little more revenue than it would have had it waited for the law to effect July 1, like most Vermont laws do. That meant the tax didn’t have to be raised by quite as much. The extra two months of collection will net an extra $1.6 million this year while closing another potential shortfall this year.

Brennan, the only Republican committee chair in the Democrat-controlled House, says it’s never easy to raise taxes, but the state had a compelling reason to do so. He says the state had a good track record with how it spent transportation funds, citing a reduction in the number of “very poor” roads and “structurally deficient” bridges as a result of federal stimulus spending.

Searles says he believes Vermont residents understand the need for the hike. “There was a lot of discussion in the wake of Irene and the destruction that happened here,” Searles says. “People in the state are not taking their transportation system for granted at all. We can get the work done if we have the resources.” And, he adds, nobody liked the idea of sending millions in federal funds back to Washington. (Watts, the researchers, notes that the issue is especially salient in Vermont, a rural state which gets a disproportionately large share of federal transportation funds).

Searles also says the legislature’s leaders as transportation committee chairs were well informed on transportation finance issues, which helped make the process easier. Despite the differences in both chambers’ bills, both parties charted the same basic path towards revenue.

How are Vermonters reacting to the hike? While there has been some organization opposition – mainly from fuel dealers – it’s likely that many drivers wouldn’t have noticed the change had it not been for news coverage of the debate. How's that possible? Prices at the pump are actually down.

“The actual impact at the pump has not been as predictable as we thought,” says Searles. “It has simply been part of the mix of gas pricing, along with the actual price of crude… some gas stations didn’t go up at all. Some went up six cents.”

In fact, the average cost of gas in Vermont today is nearly 3-cents-per-gallon less than it was a month ago, before the gas tax hike took effect, according to AAA’s daily gas price data.  “The timing was good,” Brennan says. “People aren’t really noticing it. They’re still looking at gas being way down.”

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