States Taking Tax Hit as Drivers Cut Back on Fuel
May 28, 2008

By Bill Visnic

Call the law of inevitable economics.

As any econ textbook will tell you, when the price of a good is perceived as too high, consumers will reduce consumption.

All well and good, then: fuel prices have gone through the roof, and motorists have responded in textbook fashion by cutting back on driving.

But that markedly curtailed fuel consumption is producing an unintended consequence as many states report declining fuel-tax revenues. And the majority of revenue from state fuel taxes typically is earmarked for road improvements and other infrastructure investments.

So the bottom line: If motorists drive less to save fuel, the roads they use are more likely to fall into disrepair.

Pennsylvania, for example, the sixth most-populated state in the Union, is reporting fuel-tax revenues for the first 10 months of its fiscal year are down 7.6 percent -- a shortfall of about $100 million -- from the same period last year. The state taxes gasoline at 31 cents per gallon and diesel fuel at 38.1 cents per gallon.

But fuel taxes are fixed, rather than a percentage of the fuels' skyrocketing price. Reduced consumption caused by higher prices is not offset by a proportionally larger tax.

West Virginia, which shares a border with Pennsylvania, also recently reported it has identified a significant drop in fuel-tax receipts. The Associated Press reported last week that West Virginia motorists were paying an average of $3.93 a gallon for regular unleaded gasoline, the fourth-highest price in the U.S., surpassed only by Alaska, Connecticut and New York.

West Virginia's April tax proceeds totaled $30.5 million, which is $2.35 million less than projected and a drop of about 4 percent over collections in April 2007, said Revenue Cabinet Secretary Virgil Helton.

The gas prices are also affecting West Virginia Turnpike toll collections, which were down about 5 percent in March and April.

West Virginia and Pennsylvania, along with other states, now are grappling with how to make up the shortfalls -- and how to deal with the fallout from right-minded consumer behavior that is a Keynesian case study.

Pennsylvania Governor Ed Rendell, for example, has proposed leasing the state's famous Turnpike -- the nation's first tollroad -- to a Spanish conglomerate in order to fund critically needed infrastructure investments. The 75-year lease -- strongly opposed by many in the state, would net Pennsylvania a $12.8-billion upfront payment, which Rendell proposes to invest in order to yield annual revenue exceeding $1 billion to pay for infrastructure repair and mass transit.

Posted by Michelle Krebs at 4:15 AM under Analysis | Comments (2) | digg this | Seed Newsvine

Technorati Tags: edrendell, gasprices, gastaxes