Just got back from two days at the annual Association of Indiana Counties (AIC) Legislative Conference, and road funding was indisputably the theme of the conference. AIC estimates that there currently a funding deficit of over $800M per year between the road maintenance needs of local governments and the available funding.
There are several fixes that are “live” this year in various bills under consideration by the General Assembly. Since these issues are included in multiple bills from the House and Senate, as well as the budget proposals from the House and Governor, and because these bills are constantly changing, I’m just going to describe the general principles here, rather than attempt to itemize each piece of legislation and its associated impact on road funding.
1. Eliminate “Diversions” from the Gas Tax
Although the 18c per gallon state gas tax was intended to provide road construction and maintenance funding to INDOT and local units of government, currently $144M of the gas tax is diverted to other uses, including the Indiana State Police and the Bureau of Motor Vehicles. Several legislative initiatives, including HB 1125 (Saunders), HB 1363 (Huston), and the budget propose to eliminate these diversions, which would restore approximately $42M in road funding to Indiana counties.
2. Redirect the Sales Tax on Gasoline to Road Funding
In addition to the 18c gas tax, the Indiana (along with 11 other states) levies an ad valorem (based on value/price) sales tax on gasoline purchases (the usual 7%). However, this sales tax on gasoline goes into the general fund, just like sales tax on other purchases, and does NOT go towards the funding of roads at all. Several bills propose to redirect the sales tax on gasoline to roads, either directly (i.e. the sales tax on gasoline purchases goes to road funding) or indirectly (1.5% of the total sales tax collections, which is approximately the amount of sales tax on gasoline, is redirected to road funding). It appears at this point that the 1.5%-of-all-sales-tax solution is the one most likely to survive.
If both of these strategies are successful, the result will be approximately $250M annual increase in road funding. If this funding is divided up to the various entities (INDOT, county governments, city and town governments) using the usual Motor Vehicle and Highway (MVH) formula, the result will be approximately:
- $132.5M increase to INDOT
- $68.15M increase to counties
- $49.35M increase to cities and towns
3. Capture of Additional Revenue from Alternative Fuels/Low Fuel Consumption Vehicles
This is the most open-ended and controversial of the approaches to increased road funding. The principle is that all vehicles create demand for road construction and maintenance. The two primary sources of revenue for road construction and funding are vehicle registration fees and the gas tax. The vehicle registration fee is a proxy for the existence of a vehicle, and the gas tax is a proxy for its use. Both of these components already take account of the weight of a vehicle, which is a major factor in the maintenance demands on a road.
However, vehicles that use fuels other than gasoline (e.g., compressed natural gas, electric-gasoline hybrids, electric vehicles) do not pay the same gas tax as other vehicles of an equivalent weight — and therefore do not contribute equitably to the construction and maintenance of roads. As an example, consider two Honda Civics, one a hybrid and one a conventional gasoline engine. Both will be approximately the same weight (actually, the hybrid is a bit heavier), and exert approximately the same wear and tear and demand on the road network. For a given number of miles driven on the road, the driver of the conventional Civic will pay more towards the construction and upkeep of the roads than will the driver of the hybrid Civic, despite essentially equivalent demands on the roads.
From the perspective of road funding, this is unfair. Obviously there are other policy goals besides fair funding of roads; there are numerous public policy benefits to use of vehicles that use less gasoline, including potentially fewer carbon emissions and less depletion of nonrenewable resources. However, looked at through the lens of road funding, it is reasonable to attempt to equalize the revenue generated from all vehicles of a given weight class, regardless of fuel type.
There are a number of potential approaches to resolving this issue, including fuel taxes on certain alternative fuels (compressed natural gas and liquefied natural gas), user fees for mixed fuel and electric vehicles, and — most controversially — a tax on vehicle miles travelled (VMT). The controversy from a VMT tax comes primarily from how the data is captured; it is difficult to capture the actual miles travelled by a particular vehicle without raising serious privacy concerns. I’ll write more about the different potential approaches to assessing a VMT tax in a future blog post.
One thing is clear from this current round of legislation — the amount of additional revenue to be generated from taxing alternative fueled vehicles is currently very small (estimates for current legislation are around $4.5M); however, as alternative fuels continue to increase in popularity, the differential in gas tax receipts between conventional and alternatively-fueled vehicles of a particular weight class is only going to grow.