Thursday, December 04, 2008

UDOT Seeks Hidden Massive Tax Increase for Utah

Our highly-paid executives at UDOT are plying legislators to change the way we pay taxes on gasoline in Utah. Currently we pay 24.5 cents per gallon. That is charged on top of the 18.4 cents we pay in federal gas tax, for a total of 42.9 cents of tax per gallon. Utah’s 24.5-cent fuel tax rate is somewhat below the national average of 28.6 cents per gallon (see Wikipedia article).

Fuel taxes are very close to being a use tax. In general, the more gas you buy the more wear and tear you inflict upon the road infrastructure. And the more gas you buy, the more tax you pay to help build and maintain the roads you use. While this is a regressive tax — the effective rate is higher for those that can least afford it — it is also a transparent tax. You know what you are paying because it is posted right on the pump and it is directly tied to usage.

Fuel taxation carries inherent problems of volatility and inflation for governments. When people drive less or start using more fuel efficient vehicles, fuel tax revenues decline. Since taxes are charged at a flat rate, any inflation eats away at the value of the revenues government collects, even when people buy more gas. Of course, when people buy more gas, government collects more.

Moreover, road infrastructure inflation may not track precisely with the general inflation rate. Road planning and development take years. It’s not a just-in-time kind of thing. Population growth rates can be fickle and difficult to accurately predict. Material costs can exceed inflation, such as when concrete rose drastically in price during the construction boom. The cost of acquiring real estate needed for roads is very localized. Often it is much higher in developing areas where new roads are most needed.

Sometimes these factors conspire to create a situation where fuel tax revenues fall far short of projects demanded by taxpayers. I noted last spring that state Senator Sheldon Killpack (R-Syracuse) unjustly took a lot of flak for saying that Utah would need to increase fuel taxes by more than 40 cents per gallon to meet road infrastructure demands. His point was that we need to look at a variety of options because simply increasing gas taxes wasn’t feasible.

With gas prices at a four-year low, UDOT thinks now is a good time to get the legislature to shift from charging a flat cents-per-gallon gas tax to charging tax as a percentage of the sale, similar to the way sales taxes are currently computed (see D-News article). Reportedly, Gov. Huntsman is on board with this plan.

Many that read this are probably wondering why they should care about this arcane issue. Let me bring it closer to home for you. The plan is to pass this as a revenue neutral measure at a time of very low gasoline prices and then enjoy the bounty provided by a substantial hidden tax increase when gas prices inevitably boomerang back up in the future.

Gas prices are approaching $1.50 per gallon for regular unleaded. They may be even lower by the time the legislature considers this issue, but let’s use $1.50 as a starting point. Subtracting the 24.5-cent state gas tax, that’s $1.255 per gallon. Replacing the 24.5-cent flat tax with a revenue neutral percent rate at this price would require a rate of nearly 20%. (And you thought sales taxes were high.)

As long as gas prices remained at that level, you would see no change in the end price you pay at the pump. If prices go down more, life is good; you pay even less. But when prices shoot back up to last summer’s price of $4.25 (minus the 24.5-cent flat tax = $4.005), you would be paying 80.1 cents of state gas tax per gallon instead of 24.5. Your end price would be $4.81 per gallon instead of $4.25. And, whammy, without any public input or vote by elected officials, your effective state gas tax rate just went up 327%.

It cannot be argued that this would simply reflect inflation. It would reflect inflated gasoline prices, but nothing more. This is one of the most unkind types of inflation because it does not raise any local wages; it just eats deeper into every single pocketbook and raises the prices of every good or service we buy. Dramatically increasing fuel taxes at a time of fuel inflation would be adding insult to injury.

Our legislators would have angry constituents showing up on their front lawns with torches and pitchforks demanding a special session to ease the pain. The governor’s office would be besieged 24x7 with people angrily complaining that the state is collecting record-high gas taxes from people at the time that they are hurting the most from high fuel prices. Each elected official with their hands in this pie would face a painful re-election campaign the next time around, assuming that they dared even run for re-election.

Nor is this plan a good one for UDOT, as well-paid executive director John Njord seems to believe. If he thinks that this year’s revenue shortfall (meaning that UDOT won’t get as much money as planned) is bad, just imagine what it will be like the next time planning is based on $4.81/gallon (including .801 in taxes) and gas prices fall to $1.50/gallon (and only .245 in taxes). Instead of a 10% ‘shortfall,’ UDOT would see something more along the lines of a 50-70% reduction in gas tax revenues.

Road planning is already a tough enough job. There is already enough volatility to create headaches for everyone involved in the process. Now we want to compound that volatility by a factor of seven? This is not a reasonable approach. It’s not healthy for UDOT and it’s not healthy for the citizens of Utah.

There is one more secret you should know about that everyone involved in the transportation industry knows. When Utah’s fuel tax (especially on diesel fuel) is higher than in neighboring states, trucks that are passing through the state don’t buy fuel here. They buy it on the border before entering and after leaving the state. Then these heavy vehicles exact a lot of wear and tear on our highways without contributing tax to help build and maintain those roads. Utah ends up collecting less fuel tax revenue that it would if it charged rates competitive with those of neighboring states.

I do not argue with the proposition that many of the road projects that are on hold are actually and urgently needed. But UDOT and our elected officials must not look at taxpayers as a bottomless money pit that can be tapped whenever revenues fall short. Nor should they go begging to the federal government for more money (see SL-Trib article), because that money must also come from taxpayers.

Most private taxpayers don’t have options like that when times get tough. Government should also learn to tighten its belt during lean times, even though many projects are classed as ‘investments’ needed to support economic growth, and must eventually be done anyway at a higher cost. I also cannot afford to make investments I consider quite important at the moment. Like citizens, government must learn to live within its means, even if the results include difficulties and lost opportunities.

Unless you relish the idea of paying dramatically more at the pump when gas prices go back up (as they must at some point), contact your state representative and state senator and tell them to stop this fuel tax change dead in its tracks. As mentioned above, legislators have a self preservation interest in doing so. Write a letter to the editor. Work with other citizens to keep the heat on throughout the legislative session. This sleight-of-hand tax increase must not pass.

Even if this plan does not see the light of day this session, unless it is slapped down in a big way, it will keep coming back every year, pushed by UDOT executives whose incentives differ dramatically from your own.


Unknown said...

You're wrong about the way truckers pay diesel fuel tax. Even if they fuel up in Evanston and drive all the way to Wendover without filling up in Utah, they still pay gas taxes in Utah. It's a complicated formula, but truckers pay state gas taxes based on mileage in the state, not where they get their fuel.

Scott Hinrichs said...

Thank you for the correction. Vehicles over 10,000 lbs gross weight do pay state fuel tax for the miles they travel within the state. That's one of the reasons they have those weigh stations near the borders.

Seth Adam Smith said...

This is a great blog. Keep up the good work! I'll be checking back and forth for updates! God bless!

y-intercept said...

There is a big swing in gas prices every year ... gas prices always go up during the driving season (summer). Smart businesses already know this and account for it in pricing.

I think the make up of the local gas production system should be the determining factor in the question of fixed tax v. percent tax. If we are pegging the maximum production capacity each summer, then the percentage tax is best because it would be encouraging conservation when conservation does the most.

Since the spikes in gas prices spur people to conserve, the fact that the percentage tax magnifies volatility would be a good thing as well.

Perhaps if we had a percentage tax, people would not have been quite as shocked with the 2008 summer gas price spike.

Scott Hinrichs said...

I disagree. As I stated, planning and executing road maintenance and construction projects requires as much stability as possible. It is far more costly to try to turn them off and on with wild fluctuations in revenues — which is what would happen if taxes were pegged at a percentage.

If taxes had been so formulated, UDOT would today be facing a massive shortfall instead of a relatively minor shortfall. They'd have to shut down almost everything other than snow removal and emergency service (except I'm sure they'd find a way to fund their executives' salaries).

The suggestion that it is the appropriate role of government to further distort economic swings is simply bizarre.

We are not dealing with the historical 20% price shifts during summer peak demand season. We are talking about extreme price shifts that wreak serious economic damage. Government gouging during those times should be condemned much more than any condemnation of record oil company profits during such swings.

y-intercept said...

The summer increase in gas prices is predictable. It happens every year. As road budgets are done on a yearly basis, the budgets will include both the peaks and the valleys.

The big problem is year on year budgets as there are business cycles involved in gas prices. UDOT should be budgeting over a moving average of years.

BTW, government taxes designed to soften natural fluctuations in prices have as much (if not more) of distorting effect than taxes pegged to natural fluctuations.

The energy sector is driven by peak capacity calculations. Expanding peak capacity is horrendously expensive.

In macro economic classes, professors force students to stare at supply and demand curves.

In situations where an industry hits peak capacity, you will find that prices will rise until demand ebbs.

A percent based tax would have pushed the market over that price point early.

Your post acts as if gas spike this summer was the primary problem to solve. I think the fact that our tax system was distorting the fluctuation in gas prices created greater problems for us because it had reduced our ability to handle price fluctuations.

The peak price with a percent based system would not be much higher than one with a fixed penny tax because, people, responding to price signals, would be better at pulling back demand during peak capacity days.

The fixed tax distorts the price signals that would otherwise cause people to move activities from peak capacity days to lower capacity days.

For example, I might put off my annual September waterskiing trip from September (when gas prices are high) to mid January (when gas prices are low)

... err, uh, since the lake appears to be frozen, I can cross country ski on it saving even more energy!

Scott Hinrichs said...

I can actually ski cross country, but I'm a lousy water skier. Besides, I can't fathom owning and operating a boat. The competition to get a spot on the lake is getting fierce anyway. I have brothers that own skiing boats, but I have concluded that the biggest vessel I can enjoy owning and operating is a (human powered) canoe.

I see what you are saying about people looking at the total price and the price break point being reached either way. However, I do not believe taxpayers would sit idle and watch their effective gas tax rate increase by 200-300% (or more) when federal policies drop the value of the dollar so low that oil prices shoot through the roof. You'd see tax revolts.

Of course, Gov. Huntsman probably assumes that he would be out of office by the next time we see the kind of price fluctuations we've seen recently. So that would be his successor's problem.

y-intercept said...

The weak point in my argument is that Utah does not have enough economic clout to affect world prices.

The argument I had would only work on a national level where the added increase in gas tax would spur enough conservation to actually affect the price.

That is why I premised the first reply on the state of Utah's gas production.

Utah is a weird place because our energy production and consumption are fairly well balanced. Our local concerns should be driven by the makeup of the local energy supply. If the summer time spike in usage is causing capacity problems, then we would want the percentage increase. If the annual winter inversion is a bigger concern, then we would want the fixed rate tax to keep prices from falling and encourage waste during the winter.

FYI, I linked to to this post on my blog (and I added a stock image photo of a skier).