MAY
2017

 

By
Larry DeBoer
 
Professor of
Agricultural Economics,
Purdue University

Visit Larry DeBoer's
Indiana Local Government Information website

Download the audio files or subscribe to our podcast.

 

 

05-25-17

Download the audio of Capital Comments: MP3
Follow us online at Purdue Agriculture News Columns

Follow Larry DeBoer on Twitter @INTaxRock-Stars

Road work ahead in Indiana


I saw a new orange sign on my way to the office this morning. It said “Road Work Ahead.” I thought, You got that right.

Paying for roads is a problem. Mostly we use taxes on motor fuel, but fuel sales are lower today than they were in 2001. With the gasoline tax rate fixed at 18 cents per gallon, gasoline excise tax revenue fell from $583 million in 2003 to $559 million in 2016, even as road maintenance costs increased. Something similar has happened to tax revenue on diesel fuel.

We could get more revenue by raising tax rates. Voters don’t like that, so elected legislators don’t do it very often. But in April, the Indiana General Assembly passed House Enrolled Act 1002. It will introduce an automatic adjustment to motor fuel tax rates, based on a “fuel tax index factor.” We’ll average the percentage changes of the consumer price index and of Indiana personal income, and change the excise tax rates by that percentage.

To start, we’ll make up the difference since the last increase in the tax rates. The gasoline excise tax was set at 18 cents per gallon in 2003. With the index factor, the gasoline tax rate would be 29 cents by now. The bill limits the increase to 10 cents, so on July 1, 2017 the gasoline excise tax rate will rise to 28 cents. The rates that trucks pay go up too. The special fuels tax rate will rise from 16 cents to 26 cents, and the motor carrier surcharge tax rate will rise from 11 cents to 21 cents.

After that, we’ll use the index for an adjustment each year. The state’s revenue forecast committee used predictions of 2.4 percent for the CPI inflation rate and 4.8 percent for personal income growth in 2019. That averages to 3.6 percent. That percentage of 28 cents is one penny, so in mid-2018, the gasoline tax rate should rise to 29 cents. Each of the two special fuel rates also should rise by a penny. Annual one-penny increases are likely for most years from 2019 to 2024, when the automatic increases stop.

These tax hikes will raise a lot of new revenue for roads. The wonderful Legislative Services Agency (LSA) estimates that total fuel tax revenue will rise by $541 million in 2018 and $675 million by 2021. You can see the “fiscal note” on the General Assembly’s website, at https://iga.in.gov/. Click on Legislation, then Bills, then HB 1002.

Right now, Indiana’s 18-cent gasoline excise tax ranks 45th among the states – pretty low. As of July 1, our new 28-cent rate will put us 20th highest. So, we’re rising from pretty low to middle of the pack.

But wait! The Energy Information Administration has Indiana gasoline taxes ranking 17th highest now. The added 10 cents will move us to 3rd highest. That’s because Indiana is one of only nine states that apply the sales tax to gasoline, on top of the per-gallon gasoline tax. We call the sales tax on gasoline by a special name: the “gasoline user tax,” or GUT. Add that extra 7 percent from GUT, and our per gallon tax on gasoline (at $2.25 per gallon) will be 42 cents on July 1.

In the past, the GUT was just another general revenue source, but recently we’ve started to earmark some of that money for roads. The new legislation will do that some more. Two and a half points of the 7 percent GUT will go to road and bridge funding starting in fiscal year 2018, which starts on July 1, 2017. After 2020, the General Assembly can shift more of the money to roads, though some goes to the general fund until 2025.

LSA thinks that $55 million will be shifted from the general fund to roads in 2020, and $292 million by 2024. Of course, that money is shifted from the things that the general fund supports, like schools and health care.

All told, the higher motor fuel taxes, the shift in GUT revenue, and some other new fees should add more than a billion dollars a year for road maintenance by the next decade. Road work ahead? Look for orange barrels on a street near you!

 

 

Writer: Larry DeBoer
Editor: Cindie Gosnell