Recalibrating the Motor Fuel Tax 

By Kevin Pula | Vol . 25, No. 39 / October 2017

NCSL News

Did you know?

In 1919, Oregon became the first state to impose a tax on the consumption of motor fuel used by drivers. Almost 100 years later, all 50 states, the District of Columbia and the federal government (as well as some local governments) levy motor fuel taxes (MFTs). Revenues from these taxes serve as a primary source of transportation funding.

Historically levied on a cent-per-gallon basis, taxes on motor fuel previously served as a relatively accurate proxy for a driver’s use of roadways and associated infrastructure, thus serving as a user-fee-based approach to funding transportation needs. However, modern times have brought about 21st century challenges to this 20th century revenue stream.

Nationally, vehicle-miles traveled (VMT) has been steadily increasing for many decades, save for a stagnant period during the Great Recession. With increased usage comes increased maintenance, construction and capacity needs. Conversely, total fuel purchases in recent years have leveled off as a result of significant advancements in vehicle fuel economy. Added to that are state and federal policies incentivizing or requiring vehicles to use less fuel to achieve energy and environmental health policy goals.

Exacerbating the flat revenues is the inflationary pressure on highway construction and maintenance from increased demand both domestically and globally. This in turn has put pressure on state and federal lawmakers to increase or restructure motor fuel taxes and look for other ways to finance transportation infrastructure projects.

State Action

Since 2013, 26 states and the District of Columbia have enacted legislation to increase or significantly restructure their motor fuel taxes. Recent increases range dramatically, from as little as 3.5 cents per gallon in West Virginia (2017) to 23.5 cents per gallon in New Jersey (2016).

A sub-trend of these increases is the move toward variable-rate or indexed MFTs, which at least 20 states now use to some degree. With this approach, the tax rate may fluctuate automatically year to year in response to certain metrics, such as inflation, population, fuel efficiency or even the price of fuel.

Notable state actions to implement unique or new indexing provisions include Georgia (2015) linking its MFT rate to a combination of state-wide fuel efficiency and the Consumer Price Index (CPI); North Carolina (2015) accounting for state population increases to drive up MFT rates (presumably capturing increased maintenance needs due to increased usage); and Utah (2015 and 2017) linking MFT rates to the statewide wholesale price of fuel.

Motor fuel taxes provide approximately one-third of all state transportation funding for roads. Alongside increases in this revenue stream, states are considering alternatives to make up for the diminishing outlook of traditional MFTs.

In 2016, Rhode Island became the first state in the nation to seek to implement commercial vehicle-only tolls on its highways. Through cooperation with the Federal Highway Administration and with accompanying state legislation, the state will begin upgrading critical bridges on its interstate corridors and placing tolls on those upgrades.

Nine states implemented special registration fees on electric or hybrid vehicles in 2017. Joining another 10 states with similar existing fees, a total of 19 states charge special fees ranging from $50 in Wyoming and Colorado to as much as $200 in Georgia and West Virginia.

Oregon and California are leading the way in the exploration of an alternative funding paradigm referred to as road user charges (RUCs) or mileage based user fees (MBUFs). Viewed by some as a more equitable way to collect revenues for transportation than an MFT—which can be highly dependent on the quality of vehicle one owns—an RUC charges a motorist a specific fee, 1.5 cents per mile driven in Oregon’s pilot program. The federal government is currently providing funding opportunities through $95 million of competitive grants for states to study alternative user fees.

Federal Action

Unlike state motor fuel taxes, when it comes to the federal tax on gasoline (18.4 cents per gallon) there has not been nearly as much action. In fact, the federal tax has not been raised since 1993, nearly 25 years ago. During that time, the cost of building new roads and maintaining existing ones has increased substantially.

Currently, federal funding for surface transportation infrastructure is authorized at approximately $43 billion per year, as part of the Fixing America’s Surface Transportation (FAST) Act, through September 2020. However, due to the lack of an increase in the federal fuel tax and the increase in the cost of transportation infrastructure, annual federal funding needs exceed motor fuel tax revenues by approximately $15 billion per year. In order to cover this annual deficit, the FAST Act included a $70 billion general fund transfer to the Highway Trust Fund in order to maintain its solvency through FY 2020. For a full breakdown on the FAST Act, see NCSL’s complete analysis here.

Moving forward, President Donald Trump has consistently, both during the campaign and following his election, highlighted the need to upgrade our nation’s transportation infrastructure. While an initial figure of $1 trillion in additional federal funds was proposed by the president, current discussions have centered closer to providing $200 billion, which would seek to incentivize an additional $800 billion in private, state and local funding. However, the president has yet to introduce a bill and Congress has shown little indication it is close to releasing its own proposal.