OCTOBER
2015

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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10-22-15

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Where We're Going, We Do Need Roads


October 2015 was the future that Doc and Marty visited in the Back to the Future movies. They traveled through time in a nuclear-powered flying sports car. Those of us older than 30 traveled through time too, just day by day. 

You remember what Doc said about 2015: “Where we’re going, we don’t need roads.” Sorry Doc. Yes, we do. Road funding has been in the news, with the governor’s proposal for an added billion dollars over the next four years. So it’s a good time to look at how we pay for roads since it turns out we still need them.

According to the Federal Highway Administration, Indiana had 97,553 miles of roads to maintain in 2013. (The Office of Highway Policy Information on the Web has a lot more information about roads.) 

Most of the money for roads comes from motor fuel excise taxes. Indiana taxes gasoline at 18 cents per gallon, one of the lowest rates in the country. We tax diesel fuel at 16 cents but then add a surcharge of 11 cents for big trucks. That 27 cents total is near the middle of state tax rates nationwide. We also tax motor fuel with our 7 percent sales tax – only nine states apply sales taxes on top of their excise taxes – so Indiana’s total state tax burden on fuel is high compared with other states.

The motor fuel taxes raised about $800 million in fiscal 2014, and almost all of it was used for roads. Fuel taxes were used for the state police and the Bureau of Motor Vehicles, but starting in 2014 the General Assembly decided to pay for those functions from other sources. They also earmarked 1 percent of total sales tax revenue for roads. Those two changes added about $175 million to total road funding. Altogether, we distribute more than $900 million to the state, the counties and the cities and towns for road maintenance and construction. 

We divvy up the money by using a couple of formulas. The Motor Vehicle Highway formula allocates 53 percent of its funds to the state Department of Transportation, 32 percent to counties and 15 percent to cities and towns. The amount going to each county is based mostly on vehicle registrations and on the road miles each county maintains. The city and town money is distributed based on population. There is also a Special Distribution Account, known to local governments as the Local Road and Street Fund. The state gets 55 percent of the money through that formula, and the locals get 45 percent. It’s distributed among the counties based on auto registrations (not including trucks) and then among the local units based on population and road miles.

Local governments add about $150 million in property taxes. And there’s another $70 million from the local option surtax and wheel taxes used in 52 counties.   

Now here’s the funding problem: Motor fuel taxes raise less money than they used to. Back in 2001 drivers in Indiana paid taxes on 3.3 billion gallons of gasoline. In 2014 the number was 2.9 billion. At 18 cents a gallon, that’s a loss of about $75 million. Meanwhile, road construction costs rose by about 20 percent. 

One well-known reason for the drop in fuel taxes is the improved fuel efficiency of our cars.  Average miles-per-gallon in the United States was about 13 in 1973, and now it’s 23. As fuel efficiency improves, people buy less gasoline to drive the same miles. Roads see the same wear and tear, but there’s less gas tax revenue collected. 

But the drop in gasoline sales has other causes, too. Incomes grew slowly, and people buy less gasoline when they have less ability to pay. And gas prices were high. People economize on purchases when gas is expensive.

Incomes continue to grow slowly, but now gasoline prices have dropped. Drivers will likely buy more gasoline at the lower price, which should increase fuel taxes collected, at least a little. It won’t be enough to solve the funding problem, but it will make the problem a little easier to solve.

I’m looking out my window. I don’t see any flying cars. And that means road funding will be a problem for our future.

 

 

Writer: Larry DeBoer
Editor: Keith Robinson