Kentucky stems tide of falling fuel tax revenue

By Keith Goble, Land Line state legislative editor | 3/27/2015

Gov. Steve Beshear signed a bill into law this week to thwart a nearly dime decrease in Kentucky’s fuel tax rates over a period of four months. The Wednesday, March 25, bill signing also reverses a trend that could cost the state more than one-quarter billion dollars in lost road revenue.

The governor’s administration said the new law “protects the stability and predictability of the fund going forward, preventing dramatic falls or increases.”

On Jan. 1, Kentucky’s tax on fuels dropped by 4.3 cents per gallon to 27.6 cents. The change was due to a state law that partially ties the state’s tax rates to the average wholesale price of fuel, which causes automatic changes in the excise tax on gas and diesel.

The 1980 law authorizes fuel tax rates to be adjusted every three months. It was enacted to address concerns that rising fuel costs would result in people buying less at the pump. As a result, the state would get less tax money for road and bridge work.

However, the tax rate can also decrease as fuel prices dip – as they have done in four of the last five quarters.

State lawmakers this week spent the final day of the regular session working out the details and approving a plan to avoid the fuel tax rates dropping an additional 5.1 cents per gallon to 22.5 cents when the next quarter begins on Wednesday, April 1.

Every penny drop costs the state about $30 million.

Sen. Dennis Parrett, D-Elizabethtown, told lawmakers during Senate floor discussion on the bill it is time for them to act.

“We have to stand up and take a hard stance to stop the bleeding from our road fund,” he said. “This is the right thing to do.”

The state Department of Transportation estimates the Jan. 1 change caused by lower fuel prices will cost the state nearly $130 million in lost revenue for the Kentucky Road Fund. The amount is about 6 percent of the state’s highway program, which was forecast to have $2.25 billion in the current fiscal year from all sources.

To avoid the same problems in the future, state lawmakers reached agreement on a plan to initially lower the tax rate by 1.6 cents, and to freeze the floor on the variable rate at 26 cents per gallon.

Sen. Damon Thayer, R-Georgetown, is opposed to the rule changes. He said state lawmakers are going back on their word to constituents.

“This is brought on by a false crisis created by those who are in favor of not keeping our promise to the drivers of Kentucky to have a 22-cent floor,” Thayer said during floor discussion. “I’ve voted on this gas tax floor twice before and both times I was told ‘You will never have to vote on this again.’

“Now everyone acts like potholes won’t be filled, roads won’t be resurfaced, and new roads won’t be built. That’s ridiculous.”

Sen. Jared Carpenter, R-Berea, told lawmakers he welcomes the change.

“At the end of the day money is required to take care of roads in our districts,” he said. “If we don’t provide the money to make sure our roads are taken care of that’s when you are really going to hear from your constituents.”

Another change authorizes annual adjustments in the tax rate instead of quarterly adjustments. In addition, a variance of up to 10 percent each year is allowed.

Rep. Rick Rand, D-Bedford, said he is hopeful the changes will help the state avoid the need to freeze the tax floor moving forward.

To view other legislative activities of interest for Kentucky, click here.

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