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December 2013 Policy Study, Number 13-10

   

Fuel Tax:  What Is a Fair System for Iowa?

   

Executive Summary

   

 

Finally we are seeing some much-needed relief at the gas pump this summer, so as you start to enjoy the relief of the reform from property tax, there are several entities that want to sock you with an increase at the pump by increasing your fuel tax. These entities feel that the only way to address the claimed $215 million shortfall in road funding that the Iowa Department of Transportation (IDOT) predicts is to increase your tax burden.

 

This POLICY STUDY is going to look at some innovative ways for the state to address the potential funding shortfall without increasing your tax burden. Currently, Iowa is still trying to climb our way out of the recession. We are currently seeing slow positive changes in our economy, but if we go down the road that the Iowa Farm Bureau (IFB) and Iowa League of Cities (ILC) would have us, we would all see an increase in our taxes with the cost of filling our car or truck up at the pump.

 

Currently the funding for Iowa’s roads comes from three major funds: the Road Use Tax Fund (RUTF), Transportation Investment Moves the Economy in the 21st Century Fund (TIME-21), and the Highway Trust Fund (HTF). The RUTF and TIME-21 are both state funds to pay for roads, and the HTF is a federal fund to pay for roadways within a state. Currently for every gallon of gasoline you buy, 40.4 cents is going to taxes; with diesel you are paying 47.9 cents to taxes.

 

In addition to the RUTF, the Legislature created a separate funding stream called TIME-21. This fund was created to address several issues that were developing in our state:

 

• A large and aging public roadway system.
• Increasing demands on the public roadway system.
• Flattening revenue available for public roadway improvements.
• Increasing construction cost inflation rate.

 

While the fuel tax is a significant source of state road funding, there is also other revenue that is going into this fund, such as the annual vehicle registration fee, the fee for new registrations, and other fees. It is also important to note that of the funding listed above, 95 percent must be spent on Iowa roadways per the requirement in the Iowa Constitution.[1]

 

The RUTF then breaks down with 47.5 percent going to Primary Road Fund, 24.5 percent to Counties Secondary Road Fund, 8.0 percent to Farm-to-Market Road Fund, and 20 percent to Cities Street Construction. The TIME-21 Fund is 60 percent to Primary Road Fund, 20 percent to Counties Secondary Road Fund, and 20 percent to Cities Street Construction.[2]

 

As the Iowa Department of Transportation examined changes that were developing with the funding stream, there were several red flags that they felt needed to be discussed, as these issues would have a significant impact on the funding stream over the course of time. These are some of the same concerns that led to the creation of the TIME-21 fund.

 

• Impact of inflation
• Instability of federal funding
• Impact of alternative fuel vehicles
• Increasing fuel efficiency[3]

 

Currently Iowa ranks 33rd out of the 50 states, with Missouri the only state bordering Iowa having a cheaper fuel tax than us. So currently there is an incentive to drive across the border and into Iowa to purchase gas from the other states surrounding Iowa.[4] The same is true with travelers driving through Iowa; they would know that our fuel tax is cheaper than Illinois, Minnesota, or Nebraska, which would lead them to purchase gas in Iowa over those other states.

 

The National Governors Association has a report out that addresses several innovative state transportation funding and financing ideas for the 21st Century. This report addresses several of the flaws that exist with the fuel-tax structure of paying for roads.

 

• The first argument about the fuel tax is that the purchasing power of the fuel tax decreases yearly.
• The next argument against fuel taxes is that “they are not user fees that finance a specific service or are collected only from the user of that service.”
• The third argument against the fuel tax is the fuel tax doesn’t charge drivers equally.

 

So given the arguments above about the fuel tax, this report offers several ways to pay for road systems without the fuel tax being used. This report discusses the following options:

 

• Debt-financing strategies, including state infrastructure banks;
• Tolling, vehicle miles traveled fees, congestion pricing, and other user fees;
• Public-private partnerships that leverage private capital and expertise; and
• Freight-specific strategies.[5]

 

Iowa’s approach to addressing our transportation issues has been two-fold. First, Governor Branstad made the IDOT examine their process and figure out how to implement significant cost-saving measures. This is important for every aspect of government. The IDOT has to come up with $50 million in savings, which is the equivalent of a fuel tax increase of 2 ½ cents.[6] But for the second part, the loud voices so far are pushing for the raising of taxes and fees on Iowa residents. The IDOT has finally released a proposal with suggestions to address funding shortfalls without increasing the fuel tax.

 

Some of the highlights that are in the best interest of the state would be increasing the oversize/overweight vehicle permit fees, focusing federal funding on the primary road system, and applying state tax on dyed-fuel sales.[7] These ideas are definitely a start in the right direction, but the truth is we still need more long-term solutions.

 

The proposals in this POLICY STUDY address the way to share the costs with residents and non-residents. The residents of Iowa need long-term solutions that will address the issues of our roadways. Continuing to increase the fuel tax is only a temporary solution, since you can only raise taxes so far. Iowa has to be bold in our approach and look at the private sector for ways to address these issues.

 

   

 

Click here for pdf copy of this Policy Study

 

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