Articles

(November 2004) Several legislators have been seeking support for an increase in the gas tax to support a variety of transportation related activities ranging from funds needed to match federal construction dollars to road maintenance.  A vote could be taken in the current “lame duck” legislative session that ends November 30. Here’s a primer from IssuesPA.

What is the “Gas Tax”?

According to the state Constitution, the Liquid Fuels Tax, more commonly known as the gas tax, must be spent on highway related activities such as construction, maintenance, and safety. The state supplements the proceeds of the gas tax with revenue from vehicle and drivers license fees. Together, with additional help from the federal government, they comprise almost all of the money spent by state government on highways.

Pennsylvania applies several types of taxes on fuels, each with a different rate and different base.  The basic liquid fuels and fuels use tax is the original gas tax in Pennsylvania and is used in every other state.  It uses the traditional cents-per-gallon approach.  The current rate is 12¢ per gallon.  In addition, Pennsylvania assesses an Oil Franchise Tax based on the wholesale price of gasoline.  The Oil Franchise Tax rate is set annually based on the average wholesale price of gasoline for the 12-month period ending the previous September.  The minimum rate is 13.9¢ per gallon.  For 2004 the rate is 14.2¢.  In addition, state government levies taxes on aviation fuels, alternative fuels, and fuel used by motor carriers.

The current combined tax rate is 26.2¢ per gallon (12¢ liquid fuels tax + 14.2¢ Oil Franchise tax).   And beginning in January 2005, the tax rate will jump to 30¢ per gallon.  The source of the increase is a 3.8¢ per gallon increase in the Oil Franchise Tax due to the significant increase in the wholesale price of gasoline.  The table below illustrates the recent history of the tax rate. 

Pennsylvania’s 26.2¢ per gallon rate for 2004 is the 5th highest in the nation as of January 1, 2004.  If the rates for other states remain constant, Pennsylvania’s rate of 30¢ will be the 2^nd  highest in the nation beginning January 1, 2005, trailing only Rhode Island’s 31¢.

How much money does the gas tax bring in?

In the most recently completed fiscal year, various taxes on liquid fuels combined to yield $1.1 billion. This represents over half of all receipts used for highway transportation.  Driver and vehicle license fees account for most of the remainder of funding. 

Taxes normally paid at the pump – the Liquid Fuels and Fuels Use, and Oil Franchise Taxes – generated the vast majority of those funds (97%).  Overall growth rates in gas tax receipts have been relatively low.  For example, over the past 5 years receipts increased 5.7%, barely more than half the rate of inflation.  In the previous 10 years, the increase was only 13.3% compared to a 24.2% inflation rate.  Obviously, a 3.8¢ increase for 2005 will have at least a short-term impact on the trends.                         

The overriding reason for slow growth is a moderate increase in the number of miles driven offset by greater fuel efficiency.  In a sense, funding for highways in Pennsylvania and other states has been a victim of the success of a national policy that’s resulted in a steady increase in the fuel efficiency of cars over the past 30 years.  The result?  Limited growth in the tax base. 

What does this mean for the future of the gas tax?

Historically, gas tax yields have been relatively steady but at a growth rate lower than inflation.  The result has been a growing difficulty to fund transportation needs over the past several years, particularly with the current uncertainty of federal funding.  However, the scheduled increase in the Oil Franchise Tax rate on January 1, 2005 likely will provide some level of fiscal relief to the highway budget.  How long this relief will last is anybody’s guess since it’s tied to the price of gasoline, the driving habits of the public, and the fuel efficiency of cars – all of which change over time. 

Given the impending increase in the tax rate, is this the best time to consider an additional increase?  Stay tuned.