State Sales Tax on Motor Fuel

Introduction

Executive Summary

How Will This Help?

• Provides additional funds for transportation. Increasing the statewide sales tax rate would provide funds to reduce traffic congestion and help maintain the safety and quality of Texas roads and bridges.
• Helps keep up with rising highway construction costs. Since 1991, roadway construction costs have almost doubled. Increasing the statewide sales tax would help transportation revenues keep pace with rising construction costs.
• Is not affected by increased fuel efficiency. Fuel tax revenues will likely decrease over time. The expected growth in future population means more people traveling on the roadways and using more fuel. However, today’s more fuel-efficient cars and trucks pay lower fuel tax per mile than when the tax rates were last set 20 years ago. As vehicles become more fuel efficient and alternative-fuel vehicles become more common, the number of gallons needed to go the same distance will decrease. Benefits such as less pollution and the ability to travel farther per gallon are gained. However, the resulting decrease in fuel use means less gas and diesel tax revenue to cover rising transportation needs. Increasing the current revenue stream will help slow the effects of decreasing fuel tax revenues.
• Reduces the need to borrow money or use bonds to pay for transportation projects. Texas could help slow a growing trend of using credit to pay for roadway projects.

Estimated Funding Yield

• 1 percentage point increase: $4.6 billion for transportation each year.
• From 2016 to 2019: $18.5 billion for transportation.

Implementation Examples

 Arkansas
In 2013, Arkansas voters approved a 0.5 percent statewide sales tax increase. The revenue from this increase paid for a major highway improvement program. While this tax increase is expected to expire in 2022, revenue from this increase financed an approximately $1.3 billion bond issue. When combined with other revenues, the bond issue funded approximately $1.8 billion in transportation improvements.

Opponents raised concerns about increasing the tax so soon after the 2008–2009 economic recession. Supporters pointed to the long-term benefits that infrastructure could provide the Arkansas economy. The final ballot measure, which passed 58 percent in favor to 42 percent opposed, helped to spur the construction of several highway improvement and expansion projects throughout the state.

Virginia HB 2313
In 2013, Virginia Gov. Bob McDonnell signed into law a comprehensive transportation funding package known as Virginia’s Road to the Future. With bipartisan support from both chambers, the legislature approved HB 2313, making several significant changes to the current transportation funding structure. At the time the plan was enacted, the Virginia Finance Committee estimated this law would levy an additional $800 million by the year 2018, when the changes are expected to be fully phased in.

Notably, this bill eliminated the $0.175-per-gallon tax and reduced the current exemption in retail sales on motor vehicles by 1.3 percent. This law replaced those taxes by imposing a new variable fuel tax rate of 3.5 percent of the average wholesale price of a gallon of gasoline and 6 percent of the average wholesale price of a gallon of diesel. The average wholesale price is the price of one gallon of motor fuel at the pump. In a rare move, this switchover became effective only one month later on July 1, 2013. Requests for information concerning preliminary revenue outcomes of this program are currently pending.

Georgia
Georgia authorized a 1 percent regional transportation sales tax for a period of 10 years in 12 newly created special districts. In July 2012, voters in 3 of the 12 districts approved the new sales tax (HB 277).

California
California temporarily increased the rate of the general fund portion of the state sales and use tax by 1 percent—from the current rate of 5 percent to a rate of 6 percent (AB 3c, 2009).

North Carolina
North Carolina authorized counties to pay for transit improvements with up to a half-cent sales tax increase if approved by voters (HB 148, 2009).

Issues

• The increase requires new laws to an existing tax.
• State agencies should be prepared to respond to inquiries from Legislators and the public regarding the costs and benefits of such proposals.
• A statewide sales tax increase would not be limited to roadway users but would affect everyone in the state.
• The amount of revenue created depends on the amount of goods that people purchase and can be difficult to predict.
• Raising the sales tax and dedicating the increase to transportation may make it less likely that the public will accept an additional sales tax increase for general revenue funding.

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