JANUARY
2017

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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Indiana Local Government Information website

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01-26-17

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How could we pay for roads?


The General Assembly is in session, and the big issue this year looks to be road funding. How will we raise the additional $1 billion or more that we need to maintain our roads?

Funny thing, we seem to be wedded to the idea that those who use the roads should pay for them. We donít always think this way for other expenditures. We donít for K-12 education. The Constitution doesnít allow tuition for public schools. The authors must have thought that an educated public benefitted everyone, not just the kids and their parents.

You could make the same argument for roads. We all benefit whether we drive or not. Even if you walk to the grocery store, the food on the shelves has arrived in trucks, driven on roads.

But, for whatever reason, we want drivers to pay for roads. Thatís why we accept excise taxes on motor fuel as a way to fund road maintenance. Cars and trucks wear down the roads. Cars and trucks need fuel. Taxes on fuel pay for roads. So owners of cars and trucks pay for maintaining the roads. Neat.

Lately the revenue from the excise taxes has not been enough to maintain the roads. The excise taxes are levied as cents per gallon. Inflation has driven up the price of maintaining roads, but the excise tax rates are fixed.

In the 20th century, fixed tax rates delivered ever-higher revenue because Indiana fuel sales were rising. Since 2000, though, gasoline sales have stagnated. Thatís partly due to slow economic growth. A growing economy gets more people driving to and from work and delivering goods and services. Stagnant sales are partly due to the high price of fuel in most years between 2005 and 2014. Fuel sales began to increase some when prices dropped in 2015. And, of course, stagnant sales are partly due to more efficient vehicles. If cars put wear and tear on roads but donít use much gasoline, that neat link between driving and road maintenance is broken.

What can we do? We could increase the excise taxes. The gasoline excise tax is 18 cents per gallon, and it was last increased in 2003. There are two special fuels excise taxes that add up to 27 cents per gallon, mostly paid by drivers of big trucks. Those taxes were last increased in 1988. A penny on the gasoline tax raises about $31 million, and a penny on each of the two excise taxes raises about $21 million combined. We could index the tax rates to consumer prices, so theyíd keep up with inflation. We could raise registration fees at the Bureau of Motor Vehicles, or put tolls on the interstate highways (with permission from the feds).

But here we are talking about tax increases, when weíre in the midst of cutting taxes. The inheritance tax was eliminated after 2012. The individual income tax was cut from 3.4 percent in 2014 to 3.23 percent this year. The corporate income tax was 8.5 percent in 2011, is 6.25 percent now, and is heading toward 4.9 percent by 2022. In fiscal 2017 these tax cuts have reduced revenue by about $800 million.

Those taxes donít have much to do with wear and tear on roads. Weíve seldom devoted general revenue sources to road maintenance, because thereís no neat connection between the people who pay those taxes and the people who drive on the roads. If those taxes had not been cut, would we be using that revenue for roads? Probably not.

Then thereís the sales tax. Indiana is one of only seven states that applies its general sales tax to motor fuel. At $2.25 a gallon our 7 percent sales tax yields about 15 cents. Multiply by the 3.1 billion gallons of gasoline and 1.2 billion gallons of diesel fuel, and you get $645 million. Thatís a tax on fuel sales paid by drivers. Devote that to roads, though, and you leave a hole in the stateís general fund. That means you either cut growth in education and health spending, or cancel those income tax cuts.

House Bill 1002 covers road funding. It relies mostly on excise taxes and fees. But the session has a long way to go.

 

 

Writer: Larry DeBoer
Editor: Cindie Gosnell