Infrastructure & Environment

States, Not Just Feds, Struggle to Keep Gas Tax Revenue Flowing

According to a Governing analysis, two-thirds of states' fuel taxes have failed to keep up with inflation, forcing lawmakers to revisit the politically fraught issue of raising taxes.
by | May 18, 2015

Sputtering gas taxes are a huge source of frustration on Capitol Hill, where declining revenues have undermined attempts to stabilize transportation funding for years.

But governors and state lawmakers are frustrated by weak revenues from fuel taxes as well. In nearly two-thirds of states, state-imposed fuel taxes have not kept up with inflation for two decades, according to a Governing analysis of state gas tax data reported to the Census Bureau. That is forcing legislators to consider raising gas taxes or exploring other ways to increase transportation spending.

Already this year, lawmakers in Georgia, Iowa, South Dakota and Utah increased their fuel taxes to shore up transportation budgets. North Carolina and Kentucky lawmakers passed legislation to prevent rate reductions that would have automatically occurred because the states tied tax rates to slumping fuel prices. And debates over hiking gas and diesel rates continue in Minnesota and South Carolina.

But legislators who tinker with gas taxes risk a political backlash. Earlier this month, Michigan voters resoundingly defeated a measure -- 80 percent voted “no” -- to hike gas taxes and make many other changes to boost state transportation spending. The same week, Nebraska Gov. Pete Ricketts, a Republican, vetoed a 6-cent gas tax hike passed by the state’s non-partisan legislature, although lawmakers later overrode his veto. Last fall, Massachusetts voters rejected part of a law that would have tied gas tax rates to inflation.

Inflation, fuel-efficient vehicles and changing driving habits are all undermining the per-gallon charges that are the country’s main source for transportation funding. In most states, just as nationally, those problems are worse because lawmakers rarely adjust fuel taxes. The Institute on Taxation and Economic Policy reported earlier this year that 22 states hadn’t raised their gas taxes in more than a decade.

At both the state and federal levels, fuel tax revenues have stalled.

The last time Congress raised fuel taxes, it took the vote of newly sworn-in Vice President Al Gore to break a tie in the U.S. Senate in 1993. The increases in gasoline and diesel taxes were part of a larger deficit-reduction package pushed by President Bill Clinton in his first year. It was an extremely contentious measure that passed Congress with only Democratic votes.

The federal government’s 18.4-cent gasoline tax brought in a fifth less, in inflation-adjusted dollars, in 2013 than in its first year at that level. That revenue decline comes over a period when the country’s population grew by a fifth, adding more strain to the nation’s transportation’s networks.

But fuel taxes generate less revenue in states, too. In 18 of 48 states with comparable data over the last two decades, state-imposed fuel taxes have not kept up with inflation. In some states, the drop-off is significant. In New Mexico and Illinois, fuel taxes brought in a quarter less in 2014 than when Congress raised the federal gas tax two decades ago. For Alaska, the drop-off was a third. Rhode Island’s gas tax revenues dwindled the most: The Ocean State’s fuel taxes had just half the purchasing power in 2014 as they did in 1994.

(Governing didn't count New York and Pennsylvania in its national historical totals, because both states changed the way they reported fuel tax revenues since 2000. In both states, inflation-adjusted fuel tax collections also declined, however.)

The federal government’s buying power peaked in 1994, immediately following its gas tax hike. The purchasing power of states fuel taxes peaked five years later, in 1999. In 37 states, inflation-adjusted revenues from fuel taxes slipped since 2000.

The Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, estimated that if all states had indexed their gas taxes to inflation in 1993, tax rates would have increased by more than 10 cents a gallon in 41 states and the District of Columbia. Revenues from the fuel taxes would have grown by at least 50 percent in 16 states, assuming customers bought the same amount of fuel.

Many states use sources other than gas taxes to pay for their transportation projects, and several use fuel tax revenues to cover non-transportation costs. But looking at the revenues each state receives can illustrate the benefits and drawbacks of motor fuel taxes.

State revenues are keeping up with inflation more than federal revenues

Both state and federal fuel tax revenues are declining, but states are doing better.

In the federal fiscal years of 1999 through 2013 -- the last for which IRS data for both gasoline and diesel fuel taxes are available -- federal revenues dropped 18 percent. During the same period, state fuel tax revenues dropped just 7 percent.

The biggest reason for the better state performance was the fact that California overhauled its transportation funding system in 2011, so that it is more reliant on gas taxes. California accounted for more than two-thirds of the change in revenue in that period.

But other factors are at work, too.

Joseph Henchman of the conservative Tax Foundation said it's easier to convince officials to raise gas taxes at the state level, because policymakers spend that money locally. The federal government spends most of its gas tax money by divvying it up among states.

"When state officials say they're running out of money, that matters a lot more than when the feds say it, because it's a lot more indirect at the federal level," he said.

Fuel taxes can keep up with inflation

Kentucky’s gas tax revenues were 46 percent higher in 2014 than in 1994, even after adjusting for inflation. The main reason is that a portion of Kentucky’s fuel taxes are based on fuel prices, instead of the per-gallon taxes used by most other states and the federal government, which remain level regardless of price. That helps bring more tax money into state coffers when the gas prices go up, but it can be a shock when oil prices plummet like they did last year. Kentucky lawmakers changed their formula this year to cushion the blow to its transportation budget that lower taxes would have brought.

But revenues are not always a function of policy

North Dakota’s fuel tax revenues keep rising, even though it hasn’t changed its rate in nearly a decade. Tax collections really took off with the Bakken oil boom in recent years. The population surge and migration of heavy machinery to a remote corner of the state, though, have also put a severe strain on the state’s roads. Lawmakers passed a $2.3 billion package for infrastructure improvements in 2013, then followed that up with $1.1 billion more in 2015.

Inflation matters

New Jersey has gone even longer than the federal government without adjusting fuel taxes, and inflation is eating away at the buying power of those revenues. In the past two decades, New Jersey has lost nearly a quarter of the real dollars those taxes generated. Many Democrats in the legislature have tried to raise the gas tax, but Republican Gov. Chris Christie has resisted.

The gas tax is not the only way to pay for roads

As part of a sweeping 2013 transportation package, Virginia eliminated its retail gas tax and replaced it with a wholesale tax. It also pushed the sales tax higher, hiked registration fees and added hotel taxes.

It also assumed that Congress would pass a law allowing the state to collect more Internet sales taxes money. The law stipulated that if Congress didn’t pass a law by 2015, the state would bump up its fuel taxes. Congress never passed the Internet sales tax law, so in January, Virginia hiked its wholesale rate from 3.5 percent to 5.1 percent. So, in a roundabout way, Congress did hike gas taxes after all.

Data editor Mike Maciag contributed.

State Motor Fuel Tax Data

Select your state to review inflation-adjusted motor fuel tax collections over the past 20 years.

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