Review: Gas tax increase would still come up short

A 10-cent fuel tax increase would still fall millions of dollars short of fixing the most critical needs on Iowa's costly 114,000-mile, 25,000-bridge highway system, according to a review by the non-partisan Legislative Services Agency.

In recent years, the debate over funding has centered on a 10-cent per gallon gas tax increase phased in over three years. This would generate an extra $1.55 billion over nine years, or about $173 million extra annually, according to the issue review prepared by the LSA's Fiscal Services Division in advance of the legislative session.

The additional revenue falls well short - on average more than $40 million a year - of an estimated $215 million annual gap in funding for maintenance and construction needs the Iowa Department of Transportation defines as critical.

With gas consumption projected to continue its steady decline - 12- to 22 percent over the next decade - the funding gap for critical needs would grow again almost immediately after a fuel tax increase is fully implemented, according to the review.

Gov. Terry Branstad and several Iowa lawmakers have said in recent weeks the state needs to strengthen Iowa's road fund and it appears primed to be a top issue for the legislative session. But, disagreement rages over what funding mechanism to use, including some who are fiercely opposed to increasing the gas tax at all.

The fuel tax generates about $440 million per year or about one-third of the road fund, which pays for construction, maintenance, and supervision of Iowa's highways. Fees for new vehicle registration and renewals are the other main contributor to the road fund.

Fuel tax revenue has been stagnant for the last 10 years with people driving less and using more fuel efficient vehicles. When adjusted for inflation, the buying power from the 19-cent tax on ethanol and 21-cent tax on gasoline has been dwindling. The tax hasn't been increased since 1989.

The LSA review shows only two options connected to the fuel tax generating enough revenue to cover the $215 million critical needs gap.

First, an indexed increase would pair the 10-cent per gallon gas tax increase with the consumer price index for urban consumers, such that after the increase is enacted the gas tax would be adjusted annually based on inflation. This option, which hasn't been proposed, would generate an extra $230 million per year over nine years with a slight increase over time, according to the review.

Second, a hybrid model where the fuel tax is decreased by 5 cents and a 5 percent sales tax is added, would generate $225 million extra per year over nine years with little fluctuation from year to year, according to the review.

The review states that the 10-cent fuel tax option would meet the $215 million threshold by adding an additional cent to the tax.

A straight sales tax model is projected to lose money over time, and an inflation model without the initial 10-cent increase would not cover the needs gap, according to the review. Any model that includes a sales tax element would be susceptible to fluctuating gas prices, meaning there's less certainty over long-term revenue projections, according to the review. The hybrid model would have more stability than a straight sales tax, according to the review.

The review also noted other possible funding mechanisms such as a fee for electric or hybrid cars, raising the registration fee, a local-option sales tax on fuel, remove exemption on dyed diesel used in agriculture equipment, and a mileage-based user fee.