« Home | 2007 Legislative Scorecard » | iProvo: the rest of the story » | Vouchers: Responding to Rep. Kay McIff, part 2 » | Taxes on Typical Utah Family » | Vouchers: Responding to Rep. Kay McIff, part 1 » | There has to be a better way to fund transportatio... » | Taxes Now Conference, May 4th » | Tax Freedom Day » | Corporate income tax change: single sales factor a... » | Impact of Utah state income tax changes on federal... »

Raise state gas taxes, cut income taxes

The Utah Taxpayers Association is proposing a four-pronged approach to addressing state transportation issues. These prongs are

1. Congestion pricing
2. Transportation corridor preservation
3. Prioritization of rails and roads projects based on cost-effectiveness of reducing congestion.
4. Significantly increasing gas taxes while cutting income taxes to maintain revenue neutrality

We've discussed these issues in previous posts, and we'll discuss them even more in the future. Today, we would like to discuss the fourth prong, increasing gas taxes while cutting income taxes. This would be revenue-neutral and would not decrease K-12 education spending even though individual income taxes would be cut.

Why raise gas taxes?
Up until the early 1990s, Utah relied almost entirely on gas taxes and other user fees to fund state transportation needs. In FY2008, the state will be spending almost $790 million from the state general fund (about 88% sales taxes when earmarks are included) on transportation. The split between one-time and ongoing revenues is about 50-50.

Like congestion pricing, gas taxes expose government's real cost of providing transportation infrastructure and maintenance. As the user cost increases, the growth in usage is reduced. Basic economics tells us that anything that is underpriced gets overused.

Moreover, slowing the growth in vehicle miles traveled is good for the environment.

Sales taxes, on the other hand, do not encourage efficient use of transportation infrastructure.

How can K-12 spending be protected while cutting income taxes?
The proposal would be implemented as follows:

  1. Increase gas taxes by 25 cents per gallon. This would generate $350 million in gas tax revenues, which is a little less than the amount of ongoing general fund dollars in the FY08 transportation budget.
  2. Shift $350 million in general fund dollars from transportation to higher education
  3. Shift $350 million in income tax dollars from higher education to K-12 education. (In FY08, higher education appropriations include $836.9 million in income tax dollars of which $760.4 million is for operations and $76.4 million is for capital).
  4. Cut income taxes by $350 million
What would the individual income tax cut look like?
A $350 million individual income tax cut would be a 14% reduction based on the GOPB FY2008 estimate of $2.545 billion in individual income revenues. The reduction could be achieved by a combination of the following:
  1. Lowering the 5.0% individual income tax rate
  2. Increasing the credit amounts
  3. Slowing the phase out of credits based on income
  4. Make credits refundable (helps low income)

I strongly support the idea that people who use the roads the most should be paying for them. The hot lane user fees and an increase in the gas tax directly target those who are getting the most use out of our roads. This is a great idea.

User fees for the hot lanes are easy to defend because they are optional and their availability makes congestion less of a factor for everyone. What response do you have for those who will argue that an increase in gas taxes will impact poorer Utahns who aren't paying much in income taxes right now but who could face a significant increase in their tax burden under your proposed plan?

Does your approach represent an increase in the regressivity of Utah's tax structure? Is that a bad thing in this case?

The regressivity of gas tax increases could be offset by refundable individual income tax credits (see the last item listed under How would the individual income tax look like)

In a call-in show today on KVNU in Logan, a caller asked us the following excellent question:

"If highway usage decreases as planned due to congestion pricing and increased gas taxes, won't that mean that gas tax rates may have to be increased to make up the revenue shortfall?"

In the short term, that may be the case, especially if the state uses bonds to finance roads. However, keep to two things in mind.

First, if rates go up in proportion to reduced usage, the total revenue amount would be the same.

Second, and more importantly, the savings will occur in the long run as reduced usage (or slowed growth in usage) reduces the amount of new capacity that would otherwise be needed to be built.

Post a Comment