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June 2012
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CAN'T LET GO State fuel tax goes way of most 'temporary' levies

In the genre of there's no such thing as a temporary tax comes the latest twist from the Kentucky Legislature.

There's a bill that has already passed the House to rescind a 1.5-cent drop in the Kentucky motor fuels tax and establish a "floor" to prevent a further seven-tenths of a cent drop April 1. The bill is companion legislation to Gov. Steve Beshear's $20.3 billion budget proposal. The governor asked for the measure as a way of preventing a $45 million decline in receipts for the Kentucky Road Fund, which pays for bridge and highway maintenance and improvements.

Kentucky is one of 18 states that use a formula to adjust the tax on gasoline, diesel and ethanol fuel based on average prices. The practice in Kentucky dates back to the 1980s. The formula causes the tax to rise and fall in tandem with the price of gasoline, the theory being that as prices rise, the number of gallons of fuel sold will decline and vice versa. The goal of the formula is to keep the tax revenue relatively stable despite price-driven fluctuation in the number of gallons sold.

But the rapid rise of gas prices over the past few years to the $3 to $4 a gallon range, along with a gradual public acceptance of prices at that level left state government with a windfall for the road fund that it is having a hard time letting go of. Now that the shale-oil boom is driving gas prices down again, a trend that is projected to continue in coming months, the state is projecting a decline of as much as $100 million in the road fund over the two-year budget cycle absent the pending legislation.

In general terms, fuel taxes earmarked for road and bridge maintenance and improvements make sense as long as they are reasonable. They function in essence as a user fee for the vehicle operators who use and benefit from that infrastructure, which is fair.

But the initiative to essentially undo the low end of the funding formula and place a floor under it inspires memories of what so often happens when governments pass "temporary" tax increases. Temporary increases tend to be mythical creatures. Government quickly becomes dependent on the higher revenue and when the time comes, government just can't bring itself to part with the extra money.

So if the House measure is enacted into law - and there's a good chance it will be - the fuel tax increase of the past few years (the last decrease prior to January was in 2010) becomes permanent. The tax can go up from here but it cannot go down.

The Tax Foundation ranked Kentucky's average fuel tax 18th-highest in the nation in 2013. Everyone who uses the roadways wants and expects good roads, and most are willing to pay a reasonable amount for the privilege. The hard question is: What's reasonable? The governor and the House seem to have reached the conclusion the current rate is too low. It remains to be seen what the public thinks about that.

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