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June 2012
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BEGONE Death of fuel tax hike good result for taxpayers

The death of a bill in the Kentucky Legislature to rescind a 1.5 percent drop in Kentucky's motor fuels tax is a good outcome, in our view.

We have nothing against good roads or the contractors who build and maintain them. And that's where Kentucky's fuel tax revenues go - not to the general fund, which pays for all other state activities; but the separate road fund, which is just what the name implies.

The arrangement makes sense. The fuel taxes effectively become a user fee for those who avail themselves of the Commonwealth's highways and other state roads. The more one drives, the more fuel one consumes and ergo the more one pays in fuel taxes for the privilege.

There is another sensible twist to the gas tax funding formula. Kentucky is one of 18 states that use an average price formula to adjust the motor fuels tax (which applies to gasoline, diesel and ethanol). The system dates back to the 1980s and it causes the tax to rise and fall in tandem with the average price of fuel. The theory is that as gas prices go up, fewer gallons are sold and vice versa. So to keep the underlying tax revenue relatively stable higher taxes are imposed when fewer gallons are theoretically being sold and lower taxes when volume increases.

But the sudden price spike in recent years from less than $2 a gallon to roughly double that was a secular shift in gas prices that produced a windfall of road fund dollars as drivers settled in to the new norm.

Now the price trend has started to reverse (despite the recent short-term spike, fuel prices are expected to drop for summer driving season) thanks in large part to the technology-driven boom in domestic oil production.

In fact, prices fell so much last winter that the formula caused fuel taxes to drop 1.5 cents in January and another 1 cent drop to take effect this week. Those reductions alone are projected to reduce the income of the road fund by $45 million this year. A drop of $200 million is projected over the biennium. That proved to be more than Gov. Steve Beshear and House Democrats felt they could part with.

At the governor's urging, the House narrowly passed a measure that would have rescinded the January and April fuel tax reductions and effectively put a permanent floor under the tax at October 2013 levels. The effect of course would be to raise the driving public's taxes $200 million over the next two years.

Fortunately the GOP-controlled Senate didn't buy into the plan, despite a pretty strong push by the other side's negotiators. The Associated Press described it as "four days of contentious debate between House and Senate leaders, culminating with a marathon closed-door meeting that ended at 5:30 Sunday morning."

Senate leaders held their ground, and this week House leaders dropped their support for the tax and approved a two-year budget bill without the fuel tax increase included.

It's the right outcome. Kentucky's fuel tax already is 18th-highest among the states; this in a state that ranks 44th in per capita income. Kentucky's unemployment rate is more than 1 percent above the national average and that in itself is a reflection on state policies.

There is no justification for Frankfort to pick taxpayers' pockets for another $100 million a year by short-circuiting the fuel tax formula.

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