Rich Madaleno on Gas Tax Indexing in Maryland

By Senator Rich Madaleno (D-18).

One of the important issues facing the General Assembly this year is the declining solvency of our transportation trust fund. We will be discussing various ways to increase transportation revenues. To that end, I introduced a five cent increase in the current $0.235 per gallon gas tax (SB 722) earlier this week. Last week, Delegate Bill Bronrott introduced HB 423 to index the gas tax. His proposal is similar to the one offered by Governor O’Malley during the 2007 Special Session. Former Senator Larry Levitan recently informed me that the state at one time actually had an index component as part of the gas tax. I asked our staff to review the legislative history of this issue, which is summarized below. I thought you would find it interesting.

In 1982, the General Assembly indexed the gas tax to the wholesale price of motor fuel so that as the price went up, so would the tax. As enacted, the bill set the base tax rate at $0.135 per gallon and established a mechanism for the Comptroller to determine semiannually the average wholesale value per gallon of motor vehicle fuel. If the wholesale value exceeded $1.35, the tax rate would be increased annually on July 1, so that the tax yield would equal 10 percent of the wholesale value per gallon. Since the price never exceeded $1.35, as had been expected, the index was never triggered.

The General Assembly revisited this issue in 1987. A new index was proposed tied to consumption with a base rate of 18.5 cents per gallon. Changes would be calculated using (1) the National Highway Maintenance and Operations Cost Index developed by the Federal Highway Administration and (2) fuel consumption as reported by the Comptroller’s Motor Vehicle Fuel Tax Division and could not exceed one cent in any year. A similar fuel index was being used at the time in Ohio, Wisconsin and Michigan. In Wisconsin, these automatic increases in the tax amounted to about 1 cent a year, or about $30 million statewide at the time.

Under the initial proposal, the tax rate would have been modified annually on July 1 based on changes in inflation and consumption as follows:

· The rate would increase whenever the cost index increased faster than consumption;

· The rate would decrease, but never below the floor of 18.5 cents, whenever the cost index increased slower than consumption;

· The rate would stay the same whenever consumption and the cost index changed at the same rate.

At the time it was projected that indexing the gasoline tax in this fashion would have produced $127 million in revenues between FY 1988 and FY 1992.

However, concerns over the tax increasing annually without any action taken by the General Assembly led the proposed form of indexing to be struck from the bill and all motor fuel tax indexing to be removed from the law.

During the 2007 Special Session, the governor proposed a bill increasing the gas tax to $0.240 per gallon. The motor fuel tax rates on aviation gasoline and turbine fuel were not affected by the bill. The bill also proposed another index. Beginning January 1, 2009, and every January 1 thereafter, motor fuel tax rates would have increased based on the annual Construction Cost Index (CCI) increase, a general measure of inflation associated with construction commodities. Under the bill, the motor fuel tax rate would not have increased by more than one cent per gallon for any calendar year. If there was no annual increase in the CCI, the motor fuel tax rates would not change for the following year.

Had we adopted this change the tax rates for gasoline was projected to increase to $0.2694 per gallon by 2012. Total motor fuel tax revenues were projected to increase from $8.1 million in fiscal 2008 to $104.9 million by fiscal 2012. Of the revenue generated by the new motor fuel tax rates, 70% would have been retained by the State and 30% would have gone to local governments through the Highway User Formula. Of course, the 2007 estimates were based on a level of consumption that has since declined. Currently, a one cent increase in the gas tax should generate $31 million in additional revenue.