Indexing Gas Taxes: Kentucky Shows How

While some state struggle to raise the gas tax by even a few cents a gallon, indexing the excise tax to inflation avoids these costly battles. Kentucky approved such legislation over 10 years ago. On July 1, the gas tax will increase by 2.4 cents.

Kentucky's current gas tax, 29.9-cents per gallon, is the 19th highest in the country according to the Tax Foundation chart. Tom Loftus provides the background for July's 2.4-cent increase.

The increase is automatic, the result of a state law that partly ties the gas tax rate to the average wholesale price of gas. That law has triggered small increases in Kentucky’s gas tax rate in nine of the last 10 years.

Modest annual increases add up over time. Loftus notes that the new July tax rate, 32.3-cents, will be double that of a decade ago.

The "additional revenue is anticipated within the current state budget" according to a spokesman for the Kentucky Transportation Cabinet.

The indexing, performed by the Kentucky Department of Revenue based on a survey of gas prices performed the first month of each quarter, is one of three components of the state gas tax:

  • A fixed tax of 5 cents per gallon, 
  • A 1.4 cent-per-gallon fee for cleaning up underground fuel storage tanks,
  • Plus a variable component set at 9 percent of the average wholesale price. State law places a 10 percent cap on the amount that the wholesale price can increase in a year.

Without that cap, price swings could cause a much larger price increase that presumably could carry political consequences. 

State Rep. Jim Wayne, (D-District 35, Louisville) said most people won't notice that much (increase) at the pump.  "I think the biggest problem we have to look at in the state is how do you properly fund transportation?" said Wayne. "I'm not just talking about highways, but also, bike lanes, public transportation and some of the infrastructure problems." (Wave3)

According to Kentucky's Department of Revenue, "unlike most taxes (it) collects", gas tax revenue can only be used for the "construction and maintenance of Kentucky's roads".

California's gas tax will also increase on July 1 without being based on a vote of the legislature - but by of its Board of Equalization that is required to make up for the switch from sales tax to excise tax in 2010. The increase will be 3.5-cents.

Gas tax legislation summary to date this year

Wyoming and Maryland will see gas tax increases on July 1 due to legislative action while Virginia's will decrease. Vermont's legislature increased its gas tax by 5.9-cents effective May 1. The District of Columbia Council may swap their excise tax for a wholesale sales tax pending a vote this month. Gas tax legislation was defeated in New Hampshire after passing the House, and draft gas tax language was never acted on in Iowa.

Full Story: Kentucky gas tax to rise 2.4 cents a gallon July 1

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