Plunging US retail gasoline prices could ease the passage of politically unpopular gasoline tax increases in states like Michigan and New Jersey.
State and federal legislators are loath to increase fuel taxes for fear of reprisals from voters. But growing shortfalls in state transportation funding are creating pressure to increase fuel tax rates.
Average US retail gasoline prices have dropped by $1.034/USG to $2.679/USG since April, which could make state tax hike initiatives more politically palatable.
The higher taxes, rising fuel efficiency and changing driver behavior will combine to further soften US gasoline demand.
"There are a lot of states that have known for a long time that they have some serious repairs to their infrastructure that need to be made," said Carl Davis, senior analyst for the non-partisan Institute on Taxation and Economic Policy (ITEP). "The hope is that the lower gas price now will finally be enough to put it over the top and they could actually make some improvements that have needed to be made for quite awhile."
Taxes vary from state to state. The American Petroleum Institute estimates state gasoline taxes average 30.88¢/USG. Legislatures in 23 states have not adjusted rates in at least a decade. The purchasing power of such rates has withered, contributing to shortfalls in state transportation funding.
In Michigan, where lawmakers have considered changes to one of the six-highest US rates, the state estimates it needs another $1.2bn over ten years. New Jersey transportation officials warned earlier this year the state would exhaust its five-year capital plan a year early without changes to gasoline taxes.
Michigan governor Rick Snyder earlier this month proposed replacing a 19¢/USG fixed gasoline tax with a gradually increasing, percentage-based tax. The state last adjusted fuel taxes in 1997. New Jersey Assembly transportation chairman John Wisniewski proposed a 25¢/USG increase in gasoline taxes in November to address transportation funding. And refiners are watching how carbon fees passed through to California retail customers beginning in January will disrupt improving economic conditions and driver demand in one of the largest US fuel markets.
States that adopted variable rates ahead of this year's price plunge discovered that the adjustment cuts both ways. Virginia, Maryland and Kentucky all set minimum prices for their rates but will still see portions of their assessments fall. Kentucky's 9pc tax rate on average wholesale prices will deliver a 4.3¢/USG drop and an estimated $129mn loss to the state's road fund next year.
Even if lawmakers pass gas tax changes, they may not stick. Massachusetts voters repealed an indexed gasoline tax in November, amid the four-year retail price lows. The tax was just a year old.
US lawmakers, facing similar transportation budget pressures, could consider making changes to the federal gasoline tax during debate on highway funding next year. Congress last adjusted the federal fuel excise tax 21 years ago, to 18.4¢/USG. An effort earlier this year, amid higher summer prices, failed.
The Petroleum Marketers Association of America opposes an increase in federal tax rates "but we understand that there's one coming," said director of congressional relations Rob Underwood.
"The best bet is it is going to be 2015, if they want to try and get an increase," Underwood said. "If you don't see something next year, you're not going to see it for another two years, until after the 2016 elections."
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