Larry DeBoer
Professor of
Agricultural Economics
Purdue University

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More Money for Indiana's Roads

It was a quiet session for the Indiana General Assembly. The state budget passed with time to spare. But there was at least one big change that hasn't received the attention it probably deserves. The legislature changed Indiana road funding.

Most of the money for road maintenance and construction comes from the state's motor fuel taxes. Motor vehicle drivers pay an excise tax of 18 cents per gallon on gasoline. Commercial truckers pay 27 cents per gallon in special fuel and surcharge taxes. In total, the state netted $870 million from these taxes and some smaller revenue sources for road funding in 2012.

This money must be carved up between the Indiana Department of Transportation, which maintains state highways, and more than 650 county, city and town highway, road and street departments, which take care of local roads. The sate's motor vehicle highway (MVH) account has a formula that divvies up most of this revenue. The new budget makes changes to the MVH formula.

Let's pause for a moment to be amazed at the previous sentence: "The new budget makes changes in the MVH formula." The stability of the MVH formula has been astounding. It hasn't seen a major change in more than 30 years. Something big must be happening to alter the MVH distribution.

Here's the big thing. Motor fuel sales have been stagnant for more than a decade. Fuel efficiency is up, so drivers are buying fewer gallons. Fuel prices are high, which discourages sales as people economize on driving. Income has grown slowly, so people try not to increase their spending on fuel. Indiana taxed 3.3 billion gallons of gasoline in 2001, and just under $3 billion in 2012. Revenue from the motor fuel taxes has edged downward.

Meanwhile, the cost of road maintenance has increased. The federal government's highway construction cost index has increased an average of 1.7 percent per year since 2001. That's not a very rapid increase - inflation averaged 2.4 percent during those years - but it adds up to a 20 percent increase. Falling revenues and rising costs have squeezed our state and local road budgets.

In 2012, the state distributed $687 million with the MVH formula. Not all of it went for roads, though. The state police received $91 million, the Bureau of Motor Vehicles received $33 million, the Department of Revenue received $10 million and another million went for other purposes. Those deductions totaled $135 million. The remaining $552 million was distributed for road maintenance: 53 percent to the state and 47 percent to counties, cities and towns.

Road officials have been pushing to remove the state police from the MVH formula for a long time. In the state budget that just passed, the General Assembly took the proposal even further. The legislature eliminated all of the MVH deductions. The police, license branches and tax administrators will be funded from other sources, so all motor fuel taxes will be used for state and local roads.

Indiana taxes motor fuel sales with the state sales tax. Those 3 billion gallons of gasoline, at $3.50 per gallon (for example), taxed at 7 percent, yield more than $700 million per year. That's about 10 percent of total sales taxes. Road officials have suggested that some of that sales tax revenue should be used for road maintenance, too.

Now the General Assembly agrees. The new budget allocates 1 percent of sales taxes for road maintenance to be distributed through the MVH formula. In 2012, that would have added $66 million to road funding.

In total, the new MVH distribution will add more than $200 million to state and local road funding each year, an increase of about 25 percent over the old formula. When the new money kicks in, we'll be allocating about the same revenue to roads now as we did in 2003, after adjusting for construction cost increases.

What happens after that? Sales tax revenue is likely to grow at least as fast as road maintenance costs. But the sales tax is just a small part of total road funding. We're mostly still dependent on motor fuel tax revenue, and that revenue probably won't grow enough to match cost increases.

The new budget includes a big fix for road funding. But it's probably not a permanent fix.




Writer: Larry DeBoer
Editor: Cindie Gosnell